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Author: 


Todman,  Frederick 
Simson 

Title: 

Brokerage  accounts 


Place: 


New  York 

Date: 

1916 


^^-noi.^-T' 


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Todman,  Frederick  Simson. 

Brokerage  accounts;  a  treatise  on  the  business  of 
brokerage,  its  accounting  books  and  records,  by  Fred- 
erick Simson  Todman  ...  New  York,  The  Ronald  press 
company,  1916. 

xviii,  19-338  p.  incl.  forms.    22i"".    (Ronald  accounting  series)       $3.50 


1.  Brokers — Accounting.       i.  Title. 


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Brokerage  Accounts 


A  Treatise  on  the  Business  of  Brokerage 
Its  Accounting  Books 
and  Records 


^ 


By 
FREDERICK  SIMSON   TODMAN,  M.C.S. 

LECTURER,    NEW    YORK    UNIVERSITY 
DEPARTMENT  OF  FINANCE 


RONALD  ACCOUNTING  SERIES 


NEW  YORK 
THE  RONALD  PRESS  COMPANY 

1916 


I 


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Copyright  19  i6 

BY 

THE  RONALD  PRESS  COMPANY 


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D. 


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To  The 

School  op  Commerce,  Accounts  and  Finance 

OF  THE  New  York  University 

This  Book  is  Cheerfully  Dedicated 


T)  -HBO.-?? 


Wmi«m  O.  Hewitt  Press,  Brooklyn,  Printert 
J.  F.  Tftpley,  New  York,  Blndem 


)^ 


i 


i 


PREFACE 

Wall  Street  has  been  discussed  from  almost  every 
conceivable  point  of  view.  Its  economic  value  to  our  present 
commercial  machinery  has  supplied  the  basis  for  many  finan- 
cial articles.  Its  functions  have  been  made  the  subject  of 
discourse  and  legislation. 

An  article  written  by  Professor  S.  S.  Huebner  of  the 
University  of  Pennsylvania,  emphasizes  the  relation  of  the 
Stock  Exchange  to  capital  seeking  a  market.*  He  speaks 
of  that  institution  as  the  "political  and  financial  nerve  center 
of  nations  and  the  barometer  of  national  prosperity  and 
adversity";  further  stating  that  the  stock  market  serves  a 
most  useful  purpose  in  directing  the  flow  of  capital  from 
channels  where  least  needed  into  those  where  it  can  be  most 
beneficially  and  profitably  employed. 

In  a  report  by  the  Hughes'  Commission,  appointed  in 
1908  to  investigate  exchanges,  the  New  York  Stock  Ex- 
change is  commented  upon  as  follows:  "The  volume  of 
transactions  indicates  that*  the  Exchange  is  today  probably 
the  most  important  financial  institution  in  the  world.  In  the 
past  decade  the  average  annual  sales  of  shares  have  been 
196,500,000,  at  prices  involving  an  annual  turnover  of 
nearly  $15,500,000,000;  bond  transactions  averaged  about 
$800,000,000." 

Notwithstanding  the  commanding  position  of  the  Stock 
Exchange  in  the  world  of  business  and  commerce,  and  the 
careful  consideration  it  has  received  from  almost  every 
angle,  one  most  important  factor  has  been  sadly  overlooked 
— one  upon  which  rests  the  entire  mechanism  of  "The 
Street" — its  accounting.  When  the  voluminous  transactions 
of  Wall  Street  are  considered,  the  total  absence  of  literature 


*Annals  of  the  American  Academy  of  Political  and  Social  Science,  May,  1910. 
pages  1-23. 


VI 


PREFACE 


bearing  upon  the  technique  of  its  accounts  is  a  matter  of 

surprise. 

From  the  recording  standpoint,  Wall  Street  activities 
resolve  themselves  into  a  study  of  brokerage  accounting, 
and  this  must  logically  first  discuss  the  metfiods,  practices, 
and  accounts  of  stock  brokers. 

But  Wall  Street  in  its  broader  sense  includes  not  only  the 
stock  market  and  the  clearing  house,  but  embraces  also  the 
Cotton  Exchange  through  which  approximately  15,000,000 
bales  of  cotton  are  marketed  annually,  and  the  Produce  Ex- 
change, which  deals  in  grain,  provisions,  and  cottonseed-oil. 
These  commodity  exchanges  almost  equal  in  importance 
the  Stock  Exchange  itself,  and  their  accounting  must  be 
treated  in  any  comprehensive  consideration  of  Wall  Street 
accounting. 

The  subject  of  brokerage  accounting,  as  intimated,  is  an 
almost  untrodden  field.  For  this  reason  its  interest  to  the 
practitioner  should  be  the  greater.  The  present  volume  is 
intended  to  cover  the  subject  with  reasonable  completeness 
and  to  give  at  least  a  fair  insight  into  the  very  technical 
operations  of  "The  Street." 

The  author  has  been  unable  to  avail  himself  of  the  work 

of  others  in  this  field,  as  beyond  a  few  scattered  references, 

there  is  an  utter  absence  of  literature  treating  the  accounting 

feature  of  brokerage  as  practiced  in  this  country.     The 

demand  for  such  a  treatise  prompted  its  preparation,  being 

so  written  in  partial  fulfilment  of  the  requirements  for  the 

degree  of  Master  of  Commercial  Science  of  the  New  York 

University.     The  work  is,  therefore,  of  a  pioneer  nature, 

and  the  author  hopes  that  it  may  contribute  its  mite  to  the 

science  of  accounting. 

Frederick  Simson  Todman. 

New  York  City, 
March  1,  1916. 


Chapter 


II 


CONTENTS 


PART  I— STOCK  BROKERAGE 


Customer  and  Broker     .... 

Legal  Relation  of  Customer  and  Broker 
Duties  of  the  Broker 
Duties  of  the  Customer 
Rules  of  the  Stock  Exchange 
Duration  of  the  Agency 
Stop  Orders  and  Margin  Calls 
Representation  on  the  Exchange 

The  Books  of  Account    .... 

Individuality  of  Records 

Influence  of  State  Law  and  Exchange  Rules  on 

Records 
Uniformity  in  Brokerage  Bookkeeping 
Records  Used  in  the  Stock  Brokerage  Business 


III    Purchases  and  Sales  Books  . 

Advantage  of  a  Bound  Record 

Clearing  House  and  Ex-Clearing  House  Books 

Use  of  the  Purchases  and  Sales  Books 


Page 
.     19 


25 


29 


IV    The  Blotters     .... 

Blotter  Entries 

The  Blotter  as  a  Financial  Record 

The  Principle  of  the  Blotter 

Cash  Entries 

The  Blotter  as  a  Barometer  of  Finance 

Alternating  Blotters 

Ruling  and  Arrangement  of  the  Blotter 

Distinction  between  the  Blotters 

Vll 


[•: 


33 


via 


CONTENTS 


Chapter 


V 


VI 


VII 


Page 
40 


The  Ledgers 

Classification  of  Ledgers 

1.  The  Customers  Ledger 

Hedged  Accounts 

Objections  to  the  Hedged  Account 

Customers  Ledger  Not  Subsidiary  to  General 

Ledger 
Definition  of  "Customers" 

2.  The  Private  Ledger 

3.  The  Securities  Ledger 

Stock  Loans 

The  Ruling  of  the  Securities  Ledger 
Method  of  Keeping  the  Securities  Ledger 
Auditing  the  Securities  Ledger 

4.  The  General  Ledger 


The  "Borrowed  and  Loaned"  Books    .     49 

Lending  Stocks 

Borrowing  Stocks 

The  Advantages  of  Borrowing  and  Lending 

Mark-down  and  Mark-up 

Stocks  Borrowed  and  Loaned  Book — Its  Ruling  and 

Arrangement 
Checking  the  Record 
Money  Borrowed  and  Loaned  Book — A  Record  of 

Collateral 
Collateral  Substitutions 
Payment  of  Loan  and  Return  of  Securities 
Relation  of  Money  Borrowed  and  Loaned  Book  to 

Other  Books 

Customers  Stock  Margin  Record         .     58 

Trading  on  Margin 
The  Margin  Record 
Marginal  Requirements 
Operation  on  Credit  Extension 
Operation  on  a  Cash  Margin 


VIII     Miscellaneous  Stock  Records;  Order 

of  Entry 62 

Stock  Transfer  Register 
The  Vault  List 


Chapter 


IX 


X 


1 1 


XI 


v] 


[•} 


XII 


CONTENTS 


Revenue  Tax  Register 
Solicitors'  Production  Record 
Order  of  Entry 

The  Clearing  House  Sheet  . 

The  Stock  Clearing  House 

Clearing  House  Stocks 

The  Methods  of  the  Gearing  House 

The  Gearing  House  Sheet 

Balancing  the  Clearing  House  Sheet 

Clearing  House  Deliveries 

Gearing  House  Delivery  Prices 

Receive  and  Deliver  Tickets 

The  Broker's  Clearing  House  Balance 

Balancing  the  Blotters 

Balancing  the  Gearing  House  Blotter 

The  Ex-Clearing  House  Blotter 

Further  Uses  of  the  Ex-Clearing  House  Blotter 

Balancing  the  Ex-Blotter 

Transactions  of  a   Stock  Brokerage 
House — Methods  of  Operation        , 

Typical  Transactions 

Inception  of  a  Brokerage  Partnership 

Opening  Entries 

Customers'  Purchases  and  Sales 

Financing  the  Transactions 

Borrowing  Stocks  against  Short  Sales 

Odd-Lot  Transactions 

Routine  Records 

Customers  Margin  Book 

Call  Loans 

Final  Entries 

Transactions  op  a   Stock  Brokerage 
House — Purchase  and  Sales 

The  Daily  Routine 
Borrowed  Stock 
Stock  Returns 
Short  Sales 


IX 

Page 


t.     6y 


77 


83 


1/ 


92 


/ 


CONTENTS 


Chapter 


y 


XIII 


yxiv 


i 


Page 


Cash  Items 

Financing  the  Purchases 

Premium  and  Interest  on  Stock  Loans 

Recording  the  Day's  Transactions 

The  Day's  Transactions 

The  Call  and  Return  of  Stocks  Loaned 

Interest  on  Stocks  Loaned 

Collateral  Bank  Loans 

Time  Loans 

Coupons 

Equity  in  Collateral  Loans 

Clearance  Loans 

The  Mark-Up  and  Mark-Down 

Interest  on  Bonds  Purchased  or  Sold 

Dividends  on  Stocks 

Due  Bills 

Transactions  of  a  Stock  Brokerage 
House  —  Customers'  Accounts  and 
Statements no 

Monthly  Statement 

Interest  Charges 

Relation  between  Accounts  and  Statements 

Transactions  of  a  Stock  Brokerage 
House — Closing  the  Books        .       .114 

Income 
Expense 

Omitted  Expenses 
Accruals 
Reserve  Accounts 

The  Income  Statement 

1.  Income  from  Operation 

2.  General  and  Administrative  Expenses 

3.  Solicitors'  and  Branch  Office  Expenses 

4.  Net  Income  from  Operation 

5.  Secondary  Income 

6.  Deductions  from  Income 

7.  Net  Income  from  all  Sources 

8.  Profit  and  Loss  Charges 

9.  Distribution  of  Profit 


Chapter 


XV 


CONTENTS 


The  Balance  Sheet 
Balance  Sheet  Items 
Assets 
Liabilities 

Proprietors'  Accounts 
Table  of  Equities 
Combination  Equity  Statement  and  Balance  Sheet 

Failure  and  Dissolution 

Voluntary  Dissolution 

Involuntary  Dissolution 

Release  of  Securities  Held  by  Bankrupt 

Customers'  Equity  in  Deposited  Securities 

Equity  in  Clearance  Loans 

Disposal  of  Broker's  Stock  Exchange  Seat 


XI 


Page 


123 


129 


134 


PART  II— COTTON   BROKERAGE 
XVI    The  Cotton  Futures  Market 

The  Market 

Customs  of  the  Futures  Market 

Books  of  Account 

The  Customers'  Records 

The  Street  Records 

XVII    Customers'  Records 

Purchases  and  Sales  Book 
Customers  Margin  Book 
Customers  Contract  Book 
Customers  Ledger 
General  Journal 
General  Ledger 
Cash  Book 
Balancing  the  Cash  Book 

XVIII    Customers'    Records  — The    Account 

Sales  Register      .       .  j.j 

Ine  Contract  Differences  Account 

Factors  Affecting  the  Contract  Differences  Account 


Xll 

Chapter 


Page 


CONTENTS 


Arrangement  and  Operation  of  Account  Sales 

Register 
Customers'  Accounts  Payable 
Customers'  Statements 
Statement  of  Open  Trades 
Account  Sales  Statement 


XIX     The  Street  Records         ....   148 

Purchases  and  Sales  Book 

Cotton  Contract  Blotter 

Street  Ledger 

Arrangement  of  Street  Ledger 

The  Street  Margin  Book 

Ruling  and  Arrangement  of  the  Street  Margin  Book 

Relation  between  Margin  Book  and  Street  Ledger 

Margin  Call  and  Release 

Interest  on  Margins 

Original  Margins 

Time  for  Deposit  of  Market  Margins 


XX     Settlements  between  Brokers     .       •  IS7 

Conditions  Affecting  Settlements 
Methods  of  Settlement 

1.  Direct  Settlement 

2.  Ringing  Method 

10:30  A.M.  Bids 

Ring  Clerks  and  the  Clearing  House 

3.  Street  Let-out 

4.  Tender  of  Notice 

Clearing  House  Payments  on  Settlements 
Brokers'  Statement  or  Settlement  Book 


XXI     Contract  Differences  and  the  Point 

Balance 167 

Requirements  as  to  Records 

Contract  Differences  Account 

Point  Balance 

Proof  of  Contract  Differences  Account 

Confirmation  Slips 


Chapter 
XXII 


XXIII 


XXIV 


XXV 


CONTENTS 


xm 


Page 


Transactions  of  a  Cotton  Brokerage 
House — General   .  *    .       .       .       .   176 

Typical  Transactions 

1.  Direct  purchases 

2.  Direct  sales 

3.  Hedging 

4.  Speculation 

5.  Straddles 
Notice  of  Delivery 

Adjustment  of  Difference  between  Purchase  and 
Notice  Prices 

Sales  for  Actual  Delivery 

Adjustment  of  Difference  between  Sale  and  Pur- 
chase Prices 

Expiration  of  Options 

Broker's  Net  Interest 

Borrowing  a  Place 

Transactions  of  a  Cotton  Brokerage 
House — Incidental      ....   184 

Branch  Offices 

Solicitors 

Floor  Brokerage  Business 

Clearances 

Carrying  Transactions 

Change  of  Name  or  Price 

Half-Commission  Brokerage 

Transactions  of  a  Cotton  Brokerage 
House — Closing  the  Books       .       .   189 

Adjusting  Entries 
Income  and  Expense  Factors 
The  Financial  Statement 
The  Balance  Sheet 
Dissolution 


Spot  Cotton       .... 

Technicalities  of  the  Spot  Market 
Details  of  Actual  Delivery 
Accounting  Entries  for  Actual  Deliveries 
Limits  of  a  Cotton  Contract 


.    196 


f 


XIV 


Chapter 


CONTENTS 


Cost  of  Contract 

Grades  of  Cotton 

Grade  Premium  and  Discount 

Storage  and  Labor 

Customer's  Contract  Difference  Credit 

Insurance  and  Interest  Charges 

The  Spot  Register 


Page 


CONTENTS 


XV 


Chapter 

XXX    Cottonseed-oil  and  Coffee  Brokerage  225 

Cottonseed-oil  Brokerage 
Coffee  Brokerage 


PART  III— PRODUCE  BROKERAGE 

XXVI     Produce  Brokerage — Its  Customs  and 

Records 204 

Conditions  and  Customs 
Books  of  Account 
The  Blotter;  the  Street  Ledger 
The  Clearing  House  Ledger 
Qosing  the  Books 


PART  IV— BROKERAGE  AUDITING 
XXXI    Audit  of  Stock  Brokerage  Books 

Purposes  of  Audit 


227 


Scope  of  Audit 


XXXII 


XXVII 


i 


Produce    Brokerage  —  The    Clearing 
House  System 209 

New    York    Produce    Exchange    Clearing    House 

Association 
Operation  of  the  Clearing  House  System 
The  Clearing  House  Sheet 
Clearing  House  Adjustments 
Clearing  House  and  Customers'  Settlements 
Proof  of  Contract  Differences— Grain  Account 


I 


XXVIII 


XXIX 


Margins       .       .       .       .       .       •       •  217 

Original  Margins 
Market  Margins 
Margin  Details 
Release  of  Margins 

Chicago  Board  of  Trade  Brokerage     .  221 

The  Chicago  Board  of  Trade 

The  Grain  Market 

Provisions 

Commissions  Charged  New  York  Members 

Accounting  for  Chicago  Trades 


XXXIII 


Audit   of    Stock    Brokerage   Books- 
Asset  Accounts ^ 

Stock  Accounts  Receivable  ^ 

The  Revenue  Stamps  Account  "^ 

Securities  of  Customers 

Depreciation  of  Securities  Owned 

Money  Loaned  Account    ^ 
Furniture  and  Fixtures 
Land  and  Buildings 
Stocks  Borrowed 
Dividends  Receivable 

Audit   of   Stock   Brokerage   Books- 
Liability  Accounts— Income   Items  243 

Liability  Accounts 
Accounts  Payable    ^ 
Dividends  Payable   ^ 
Stocks  Loaned 
Bank  Loans  and  Brokers'  Loans  ^ 

Income  Items 
Commissions 

Wet  ^^%f'^f  ^^'^^'^  ^"  Customers'  Accounts 
Interest  on  Stock  Loans  and  Premiums 
Expense  Items 
Final  Procedure 


•m         I  ■Pw^ 


^^, 


XVI 


Chapter 
XXXIV 


XXXV 


h} 


CONTENTS 


Audit  of  Cotton  Brokerage  Books 

Outline  of  Audit 

Accounts  Receivable 

Street  Margins 

Open  Trades  of  Customers 

Verification  of  the  Contract  Differences  Account 

Accounts  Payable 

Commissions 

Interest  on  Margins 

Audit  of  Other  Commodity  Departments 


Page 

.    249 


Chapter 


CONTENTS 


PART   V— FORMS 
Stock  Brokerage  Forms  ....  255 

1.  Purchases  and  Sales  Book— Clearing  House 

2.  Purchases  and  Sales  Book— Ex-Clearing  House 
3a.  Blotter  (left) 

3b.  Blotter  (right) 

4.    Securities  Ledger 

5a.  Stocks  Borrowed  and  Loaned  Book— Borrowed 

Section 
5b.  Stocks   Borrowed  and  Loaned   Book— Loaned 

Section 
6a.  Money  Borrowed  and  Loaned  Book— Borrowed 

Section 
6b.  Money  Borrowed  and  Loaned  Book— Loaned 

Section 
7.    Margin  Card,  showing  an  account  long  of  the 

market 
Margin  Card,  showing  an  account  short  of  the 

market 
Loose-Leaf  Margin  Sheet 
Stock  Transfer  Register 
Vault  List 

Revenue  Tax  Register 
Oearing  House  Sheet 
Gearing  House  Blotter  (left),  showing  methods 

of  balancing 
14b.  Gearing     House     Blotter      (right),     showing 

methods  of  balancing 


XXXVI 


& 

9. 

10. 

n. 
12. 

13. 
14a 


^i 


ISa.  Ex-Qearing    House    Blotter    (km     .i,„   • 

transactions  at  tin,e  of  in^pt/on    'f  bt ZTf 

ISb   Ex7  '  T'''  °'  P-^^hases  or  sales  ' 

^Sactions   ?r    ^'T'    <"«"*>'    ^"-'"R 

t;?aS  of  r"  •  ^'r^    <"«•«>•   ^^owin^ 

17  r...        .*  *''^*""8  """"se  balances 

I?b""r'    **°"*'^    Statement-Aciunt    of 

18  r/.       •^°""'-^^«'^<' Transactions 

'rhHoneSL^    Statement-Account    of 
''    '"HrrBro'^nLt'-— --nt    of 

"•    ;rZ'TraSons"--'-^-     ^^ 

^.    Customer's  Ledger  Account-John  Tones-Lo„. 

IhoT'^'^"  AccountJ^HenS  BroiTn!! 

23.  Solicitors'  Production  Record 

24.  Eqmty  Table  or  Statement  of  Margins 

Cotton  Brokerage  Forms 

25.  Purchases  and  Sales  Book 
-•    ^°Se-Leaf  Margin  Sheet 

2    S: me":  Sr  ^-■^-^-^eaf  Sheet 

29.    General  Journal 

3^.  Cash  Book-Receipts 

30b.  Cash  Book-Disbursements 

31.    Street  Margin  Ledger 

,f    ^*^eet  Ledger-B.  &  Co. 

^.    Customer's  Statement 

34.    Statement  of  Open  Trades 

Z'    o ''''''""^  ^^^^^  Statement 
36a.  Street  Blotter  (left) 

-36b.  Street  Blotter  (right) 

3«>.  street  Marfin  B:ot  !Sl^7ish^rt"=nt 


xvii 
Page 


283 


ill 


xviii 
Chapter 


CONTENTS 


39.  Margin  Call 

40.  Margin  Response 
41a.  Margin  Certificate 

41b.  Margin  Certificate  (back) 

42a.  Street   Blotter    (left),   showing   Street   let^ut 

transactions 
42b.  Street  Blotter   (right),  showing  Street  let-out 

transactions 

43.  Gearing  House  Sheet  used  in  Settling  Trans- 

actions 

44.  Bill  used  in  Settling  Transactions  in  Gearing 

House 

45a.  Broker's  Statement  or  Settlement  Book  (left) 

—Payment  Side 
45b.  Broker's  Statement  or  Settlement  Book  (right) 

-Collection  Side  ^ 

46.  Customers'  Open  Trades 

47.  Street  Open  Trades 

48.  Contract  Differences  "Dummy" 

49.  Notice  of  Delivery  and  Form  of  Transfer 

3U.    Demand   by   Purchaser   preceding   Delivery  of 
Cotton 

51.  Solicitors*  Production  Record 

52.  White   &   Co.'s   Account   in   Fairfield  &   Co's 

Street  Ledger 

53.  McFarland  &  Co.'s  Account  in  White  &  Co 's 

Street  Ledger 

54.  White  &  Co.'s  Account  in  McFarland  &   Co 's 

Street  Ledger 

55.  Spot  Bill 

56.  Spot  Register 


Page 


XXXVII    Produce  Brokerage  Forms 

57.  "Bought"  Slip 

58.  "Sold"  Slip 

59.  Qearing  House  Sheet  (January  5^ 

60.  Gearing  House  Sheet  (January  6) 


313 


•<♦ 


1: 


Brokerage  Accounts 


Part  I — Stock  Brolcer 


age 


CHAPTER    I 

CUSTOMER   AND   BROKER 
Legal  Relation  of  Customer  and  Broker 

Under  the  law  of  agency  it  is  clearly  pointed  out  that  , 
broker  constitutes  himself  an  af^ent  in  /  ^^.^^  °"*  ™'  * 
nf  Ui.        ^  agent  m  executmg-  the  order* 

Hen      aruTerof'"  '"'  "  ""  "^""''^^  ^    '^"'^o^^ 

the  right  ant  h/^^^^^^  ^-^  '"  determining 

ract       n  a  h!  T  1  '^'  ''''^''''''  P^^''^^  ^o  the  con 

and  therefore  l^und  "fo^w        di^^^^^^^^^^^  ^"  ^^^"1 

L^hTalid*? ':  ^^^"■"- '''  ^ "  -sTr 

tomer  who  alone  takes  the  risk  of  the  venture 

in  the  case  of  Markham  v.  Jaudon  f41  N  Y   ?^A^    •* 
was  held  in  substance  that  a  broker 'c^ir  ^'  '* 

times  be  of  «,rl,  ,    i!  *  dealings  may  some- 

tfe  broker  a„  ,^n,  '  '°""*'°  "■"'■'"" 


'Galigher  v.  Jonej,  129  U.  S.  193. 


19^ 


20 


STOCK    BROKERAGE 


i' 


CUSTOMER    AND    BROKER 


21 


P 


The  broker's  agency  usually  carries  with  it  a  personal, 
material  interest;  that  is,  he  has  an  interest  in  the  subject 
matter  of  the  contract  by  reason  of  necessary  outlays  and 
advances  made  for  the  customer  while  the  account  is  still  in 
force.  This  material  interest  extends  to  the  equity  which 
the  broker  may  have  on  account  of  commissions,  or  part 
payment  for  stocks  purchased  and  interest  accrued.  The 
term  most  frequently  used  to  characterize  dealings  in  which 
such  interests  arise,  is  "marginal  trading." 

Duties  of  the  Broker 

1.  The  law  of  agency  imposes  upon  the  broker  the  exer- 
cise of  reasonable  skill,  diHgence,  and  good  faith. 

2.  The  law  of  agency  enacted  in  New  York,  which  be- 
came effective  as  a  statute  in  1910,  strictly  prescribes  that 
the  broker  must  submit  a  statement  of  purchase  or  sale  upon 
the  execution  of  an  order,  stating  the  description  of  the  secu- 
rities traded  in,  the  name  of  the  person  or  firm  from  whom 
purchased  or  to  whom  sold,  and  the  exact  time  of  execution. 
The  penal  law  also  provides  that  any  broker  who  refuses  this 
information  within  one  day  after  a  written  demand  has  been 
made  shall  be  guilty  of  a  misdemeanor,  and  such  infraction 
shall  be  punishable  by  a  fine  or  imprisonment,  or  both. 

3.  The  broker  also  contracts,  although  impHedly,  to  pro- 
vide the  means  with  which  to  make  delivery  to  the  purchaser 
in  the  event  of  a  "short"  sale  by  a  customer. 

4.  The  broker  also  agrees  to  carry  the  "short"  account 
of  a  customer  for  a  reasonable  length  of  time,  thus  allowing 
the  latter  an  opportunity  to  buy  in  or  "cover"  such  shortage 
at  a  lower  price. 

5.  A  very  important  duty  devolves  upon  the  broker  to 
notify  his  principal  before  closing  an  account  ia  the  case  of 
inadequacy  of  margin  to  protect  the  customer's  holdings. 


I 


t4 


There  are  various  circumstances  which  enter  into  such  cases, 
where  the  important  point  of  dispute  centers  about  questions 
of  reasonable  time,  service  of  notice,  past  habit  of  dealing, 
usual  custom,  and  other  factors  which  preclude  the  establish- 
ment of  a  fixed  rule  to  govern  the  enforcibility  of  the  broker's 
duty  to  notify. 

6.  Inasmuch  as  the  broker  is  an  agent,  he  must  render  an 
accounting  to  the  customer  whenever  such  a  statement  is  de- 
manded. An  action  in  equity  may  be  instituted  against  the 
broker  upon  failure  by  him  to  comply  with  the  customer's 
demand  for  a  statement.  Here,  again,  the  fiduciary  nature 
of  the  broker's  employment  is  made  manifest. 

Duties  of  the  Customer 

The  customer,  as  well  as  the  broker,  has  certain  duties  to 
perform  and  rules  to  adhere  to  in  his  transactions  with  his 
agent,  the  broker.     These  duties  are  as  follows : 

1.  The  customer  should  keep  his  account  amply  mar- 
gined. 

2.  The  customer  must  indemnify  the  broker  for  all  out- 
lays and  losses  incurred  for  his  account. 

3.  The  customer  impliedly  agrees  to  pay  the  usual  com- 
mission, and  as  soon  as  his  order  is  filled  this  charge  auto- 
matically becomes  an  obligation. 

4.  The  customer  impliedly  authorizes  the  broker  to 
pledge  any  securities  purchased  for  him,  for  an  amount  not 
to  exceed  the  total  indebtedness  in  such  customer's  account. 
Formerly  this  authority  was  frequently  carried  so  far  as  to 
jeopardize  the  customer's  equity.  To  prevent  this  malprac- 
tice, a  law  was  enacted  which  strictly  forbids  the  broker 
from  overborrowing  on  his  principal's  securities.  A  viola- 
tion of  this  law  makes  the  offender  liable  for  an  action  in 
conversion. 


A 


i 


22 


STOCK    BROKERAGE 


Rules  of  the  Stock  Exchange 

Both  the  customer  and  the  broker  agree  to  abide  by  the 
rules  and  regulations  of  the  Exchange  where  the  transaction 
is  consummated.  The  constitution  of  the  New  York  Stock 
Exchange  is  so  replete  with  rules  for  trading  and  conduct  of 
its  members,  that  misunderstandings  as  to  the  general  pro- 
cedure seldom  go  to  court  for  decision. 

Duration  of  the  Agency 

The  rights  and  the  duties  of  the  two  parties,  broker  and 
customer,  continue  until  the  purposes  of  the  agency  shall 
have  been  consummated.  They  are  terminated  through  the 
sale  of  securities  held  by  the  broker  for  the  benefit  of  his 
principal ;  or  by  a  transfer  of  the  account  and  the  securities 
upon  payment  made  by  the  customer;  or  upon  payment  for 
his  benefit  by  a  third  party. 

In  cases  where  a  customer  is  "short"  of  the  market,  the 
account  is  technically  closed  at  the  time  of  "cover,"  or  in 
other  words,  when  a  purchase  is  made  against  the  shortage. 

In  the  case  of  a  "close-out"  or  involuntary  disposition  of 
the  principal's  holdings — either  "long"  or  "short" — ^the 
account  is  closed  and  the  agency  thereby  terminated  against 
the  customer's  wish. 

This  method  of  closing  an  account  is  in  line  with  the 
principle  of  law  which  gives  a  person  the  right  to  preserve 
his  lien  or  equity  in  the  subject  matter  of  a  contract. 

Stop  Orders  and  Margin  Calls 

The  system  of  "stop  loss  orders"  is  resorted  to  in  cases 
where  a  customer's  margin  is  near  the  point  of  exhaustion; 
and  before  his  stock  is  sold,  it  is  always  to  be  presumed  that 
sufficient  and  reasonable  notice  has  been  served  upon  the 
customer,  declaring  the  intention  of  the  broker  to  "close  out" 


CUSTOMER    AND    BROKER 


23 


the  account.  This  notice  must  state  the  time  and  the  place 
of  disposition.  What  constitutes  reasonable  and  sufficient 
notice  is  determined  by  the  circumstances  of  the  particular 
case.  Generally  speaking,  the  broker  should  notify  his  cus- 
tomer that  his  margin  is  running  low,  and  request  additional 
margin  before  the  account  is  closed  out. 

Where  the  market  is  "wild,"  the  customer  should  be  kept 
informed  so  that  proper  provision  may  be  made  by  him  for 
the  protection  of  his  interests.  In  a  normal  market,  how- 
ever, more  formal  notice  should  be  sent,  when  the  conditions 
are  such  as  to  require  the  customer's  attention.  But  it  must 
again  be  emphasized  that  it  is  incumbent  upon  the  broker  to 
give  notice  before  any  steps  are  taken  by  him  to  make  dispo- 
sition of  a  customer's  securities. 

Upon  payment  made  by  the  customer  in  answer  to  the 
call  for  additional  margin,  or  when  a  reduction  in  the  hold- 
ings has  taken  place,  the  stop  loss  orders  should  be  cancelled 
and  the  account  allowed  to  continue  as  theretofore. 

Representation  on  the  Exchange 

All  the  more  important  concerns  engaged  in  the  trading 
of  securities  for  the  benefit  of  third  parties  have  representa- 
tion on  the  "board"  or  "floor"  of  the  Stock  Exchange  in  the 
person  of  a  firm  member.  All  orders  for  the  purchase  or 
sale  of  securities  are  sent  to  him  for  execution. 

Many  concerns,  however,  though  actively  engaged  in  the 
stock  and  bond  business,  have  no  connection  with  the  Stock. 
Exchange.  AH  their  orders  for  the  purchase  or  sale  of 
securities  are  given  to  a  brokerage  firm  which  has  member- 
ship in  the  Exchange,  and  the  latter  firm  treats  the  transac- 
tions in  the  same  manner  as  they  do  other  customers'  com- 
mitments. 

These  non-membership  firms  keep  accounts  with  cus- 
tomers in  the  usual  way,  but  they  must  also  keep  accounts 


24 


STOCK    BROKERAGE 


with  their  brokers  who  execute  their  orders  on  the  Ex- 
change. Thus,  if  a  customer  desires  to  purchase  100  shares 
of  Steel  at  60,  the  order  is  given  to  the  Stock  Exchange 
house,  and  if  executed,  will  be  entered  in  the  following  man- 
ner: The  customer  is  charged  with  $6,012.50  (brokerage 
$12.50),  and  the  Stock  Exchange  concern  is  credited  with  a 
like  amount.  This  entry,  as  is  the  case  with  all  other 
entries,  is  passed  through  the  usual  general  journal.  If  the 
stock  is  purchased  outright  and  paid  for  in  cash,  the  trans- 
action is  passed  through  the  ordinary  cash  book.  No  tech- 
nical books  of  account  are  necessary. 

The  question  might  properly  be  asked  how  such 
brokers  find  it  worth  their  while  to  engage  in  this  business. 
The  answer  is  that  a  small  profit  is  realized  in  the  difference 
in  interest  between  what  the  broker  is  charged  and  what  he 
in  turn  charges  his  customers.  The  truth  of  the  matter  is 
that  most  of  the  profit  from  such  a  business  is  made  in  bond 
transactions  not  listed  on  the  Exchange.  In  such  bond  deals 
the  usual  commission  of  1/8%  is  charged  by  the  broker, 
besides  any  other  perquisite  which  he  may  receive  in  the 
transaction.  To  illustrate  the  latter  point,  suppose  that  the 
broker  receives  a  bid  for  bonds  at  100  minus  1/16,  and  that 
he  makes  the  offer  to  his  client  at  100,  or  100  plus  1/8  com- 
mission. All  such  differences  make  for  profit.  Persons 
engaged  in  this  business  usually  operate  on  a  limited  capital, 
and  their  profits  are  not  any  too  large. 

There  is  still  another  group  of  Stock  Exchange  concerns 
which,  while  operating  on  the  Exchange,  do  not  settle  their 
own  transactions,  leaving  this  matter  entirely  in  the  hands 
of  other  firms.  For  this  service  they  are  charged  a  com- 
mission of  1/32%  on  purchases  and  a  like  charge  for  selling. 
Such  brokerage  houses  do  not  have  occasion  to  use  technical 
books,  as  all  entries  are  passed  through  the  journal  or  the 
cash  book. 


CHAPTER    II 

THE   BOOKS   OF  ACCOUNT 

Individuality  of  Records 

Generally  speaking,  each  line  of  business  has  its  own 
records  peculiar  to  that  business,  from  which  it  should  be 
possible  to  read  the  history  of  the  enterprise.  Also,  if  these 
books  are  systematically  arranged,  it  should  be  possible  to 
compile  from  them  such  financial  statements  as  will  enable 
the  executives  to  determine  the  present  condition  and  the 
future  administrative  policy  of  the  business.  Hence,  for  an 
accounting  system  to  be  efficient  it  must  be  one  "created  to 
meet  the  particular  needs  of  the  business  for  which  it  is  in- 
tended, and  not  a  general  system  forced  on  the  business 
regardless  of  its  individual  requirements."* 

Influence  of  State  Law  and  Exchange  Rules  on  Records 

Individual  needs  in  the  business  of  brokerage  require 
that  the  set  of  books  employed  to  record  the  transactions 
be  of  such  construction,  ruling,  and  arrangement  as  to  con- 
form not  only  to  the  type  of  the  organization,  but  to  the 
somewhat  dictatorial  policy  of  bookkeeping  custom  which 
prevails  in  "The  Street."  The  very  technical  pursuit  of  the 
business  itself  presupposes  a  set  of  technical  books.  Also, 
to  some  extent,  the  books  are  affected  by  the  laws  of  the 
state  and  the  rules  of  the  Exchange.  Likewise,  the  by-laws 
of  the  Stock  Exchange  relating  to  the  delivery  of  securities 
and  the  commission  laws,  prescribe  certain  books  which  must 
contain  specified  information.  To  illustrate  the  extent  of 
Exchange  supervision  when  hearings  are  in  progress,  the 
Board  of  Governors,  or  any  special  committee  which  that 

♦"Practical  Accounting  Methods,"  Moxey,  page  1. 

25 


t   I   * 


26 


STOCK    BROKERAGE 


body  may  designate,  may  demand  and  enforce  the  produc- 
tion of  all  the  private  books  of  account  used  by  any  member 
of  the  Exchange,  under  pain  of  suspension  or  expulsion. 

Uniformity  in  Brokerage  Bookkeeping 

Unlike  mercantile  or  manufacturing  businesses,  in  which 
the  books  and  the  method  of  keeping  them  are  so  often  the 
unrestricted  selection  of  the  employer  or  the  bookkeeper,  and 
vary  in  almost  every  case,  brokerage  books  are,  to  a  certain 
extent,  uniform  in  all  the  different  brokerage  houses.  What 
is  more,  the  method  of  keeping  these  books  is  practically  the 
same  in  the  different  houses  in  spite  of  the  fact  that  a  better 
grasp  of  accounting  principles  may  dictate,  in  some  in- 
stances, a  more  sensible  and  accurate  handling  of  certain 
items.  Even  though  the  books  may.  be  elaborated  and 
vary  as  to  detail,  the  principles  underlying  the  theory 
and  the  construction  of  the  accounts  remain  unchanged  and 
unchallenged. 

Behind  this  supporting  theory  is  to  be  found  the  in- 
violable custom  of  doing  business.  Each  brokerage  house 
meets  practically  the  same  problems  as  does  its  neighbor, 
and  the  solution  and  disposition  of  the  problems  are  univer- 
sally and  well  established.  There  are  seldom  to  be  met  two 
conflicting  theories  to  render  a  problem  unworkable. 

For  purposes  of  analogy,  let  us  take  two  banks  doing  the 
same  kind  of  business  and  located  in  the  same  vicinity.  As 
the  supreme  authority,  the  banking  laws  are  the  directive 
agencies  for  the  conduct  of  the  business.  A  strict  adherence 
to  banking  custom,  or  what  may  be  termed  precedent,  would 
very  likely  be  responsible  for  the  establishment  of  some  posi- 
tive accounting  system  which  would  be  found  in  either  bank. 
The  introduction  of  the  clearing  house  brings  new  needs  in 
connection  with  the  records  employed,  which  are  the  same 
for  both.      As  a  result  of  this  we  find  that  the  system  of 


THE    BOOKS    OF    ACCOUNT 


27 


accounts  obtaining  in  one  bank  may  be  safely  expected  in 
the  other  bank  doing  a  similar  business.  Thus  it  happens 
that  the  books  of  account  of  a  business  like  banking  or 
brokerage,  although  highly  developed  and  diversified  in 
character,  are  the  creatures  of  the  same  necessities,  and  are 
therefore  in  their  important  features  practically  the  same. 

At  this  juncture  let  us  remember  the  fundamental  prin- 
ciple that  books  are  either  journals  or  ledgers;  they  either 
recite  facts  or  summarize  them.  If  we  can  take  the  com- 
ponent parts  of  the  antiquated  day  book  and  call  one  section 
the  purchase  journal ;  one,  the  sales  journal ;  the  third,  pur- 
chase returns;  and  the  fourth,  sales  returns,  etc.,  the  division 
should  not  confuse  us  if  we  but  remember  the  origin  and 
character  of  the  book.  For  the  same  reason  the  high-sound- 
ing and  technically  named  records  of  the  broker  should  not 
be  confusing.  Some  of  these  are  statistical  in  nature  and 
construction,  and  can  scarcely  be  called  financial  books  of 
account.  Others,  of  which  mention  is  made  later,  indicate, 
if  by  no  other  means  than  their  names,  the  class  to  which 
they  belong. 

Records  Used  in  the  Stock  Brokerage  Business 

The  books  of  account  and  record  which  are  most  com- 
monly found  in  the  business  of  buying  and  selling  securities 
for  customers  are  as  follows : 


1.  Purchases  and  Sales  Books 

2.  Blotters 

3.  Customers  Ledger 

4.  Private  Ledger 

5.  Securities  Ledger 

6.  General  Ledger 

7.  Stocks  Borrowed  and  Loaned  Book 

8.  Money  Borrowed  and  Loaned  Book 


y 


28  STOCK    BROKERAGE 

9.  Margin  Book 

10.  Stock  Transfer  Register 

11.  Vault  List 

12.  Revenue  Tax  Register  (required  by  law)' 

The  individual  books  and  records,  in  the  order  given 
above,  are  analyzed  and  explained  in  detail  in  the  several  suc- 
ceeding chapters ;  the  form,  ruling,  and  arrangement  of  each 
being  shown.  A  study  of  form  and  ruling  is  important  in 
technical  books  of  account  such  as  these.  Half  of  the  ques- 
tion as  to  whether  the  record  is  one  of  original  or  secondary 
entry,  is  answered  by  a  knowledge  of  the  prescribed  con- 
struction of  the  accounting  media.  Since  there  has  been 
such  a  complete  departure  from  the  simple  column  system  of 
books,  columnarization  also  should  be  closely  observed  in 
this  study. 


s 


CHAPTER    III 

PURCHASES   AND    SALES    BOOKS 

Advantage  of  a  Bound  Record 

As  has  been  mentioned,  the  broker  is  mainly  occupied  in 
trading  in  securities  for  the  benefit  of  third  persons.  There- 
fore, the  first  book  for  recording  transactions  is  the  "Pur- 
chases and  Sales  Book."  This  may  be  either  a  loose-leaf 
device  or  a  bound  book.  While  loose-leaf  systems  are  rather 
prevalent,  it  appears  that,  as  a  book  of  initial  entry,  the  con- 
tents of  this  record  could  be  best  preserved  in  bound  form, 
thus  avoiding  the  probability  of  loss  or  destruction  inherent 
in  loose-leaf  devices. 

Clearing  House  and  Ex-Clearing  House  Books 

By  reason  of  there  being  an  arbitrary  classification  of 
stocks  into  two  divisions,  i.e.,  (1)  clearing  house  issues,  and 
(2)  ex-clearing  house  issues,  it  is  found  very  convenient  to 
employ  two  purchases  and  sales  records.  The  ease  with 
which  odd  lots  of  stocks  and  bonds  can  be  segregated  from 
the  clearing  house  listings,  makes  this  division  a  very  simple 
and  expedient  one.  Thus,  the  ex-clearing  house  book  will 
contain  odd  lots  of  a  clearing  house  nature,  hundred-share 
items  of  an  ex-clearing  house  character,  and  odd  lots  of  the 
latter  class;  also  bonds  of  all  descriptions.  The  clearing 
house  book  contains,  strictly,  listings  of  the  Clearing  House 
in  quantities  of  100  shares  or  multiples  thereof.  The  two 
books  are  similar  in  construction,  the  arrangement  being 
such  that  a  complete  history  of  each  transaction  is  given. 
The  transactions  of  each  day  are  grouped  conveniently  and 
chronologically. 

29 


30 


STOCK    BROKERAGE 


k 


From  Forms  1  and  2  it  will  be  seen  that  all  essential 
information  concerning  purchases  and  sales  is  furnished  by 
these  records. 

Use  of  the  Purchases  and  Sales  Books 

The  subject  matter  contained  in  these  forms  is  almost 
self-explanatory.  But  as  some  question  might  be  raised  as 
to  the  uses  of  the  "When  Received,"  "When  Delivered,"  and. 
"Time"  columns,  a  word  of  explanation  becomes  necessary. 

As  stated  more  fully  later,  all  securities  are  scheduled  for 
delivery  upon  the  next  business  day,  Saturdays  excepted.  If 
the  seller  is  unable  to  deliver  within  the  prescribed  time,  he 
has  "failed  to  deliver,"  and  makes  up  for  this  deficiency  by 
delivering  the  securities  in  question  upon  the  next  following 
day  and  within  the  set  time. 

The  "Time"  column  is  used  for  the  purpose  of  recording 
the  character  of  the  accepted  bid  or  offer  as  made  between 
the  brokers  in  the  transaction. 

Under  Article  XXIII,  Sec.  3  of  the  Constitution  of  the 
New  York  Stock  Exchange,  bids  and  offers  for  the  purchase 
and  sale  of  securities  may  be  made  as  follows : 

(a)  "Cash,"  i.e.,  for  delivery  upon  the  day  of  contract. 
As  soon  as  the  bid  or  offer  is  accepted,  the  stocks  and  bonds 
are  delivered  to  the  broker  and  payment  is  made  upon  them. 

(b)  "Regular  way,"  i.e.,  for  delivery  upon  the  business 
day  following  the  contract.  This  is  the  most  common 
method  of  dealing,  and  in  absence  of  any  other  specifications 
in  connection  with  the  purchase  or  sale,  it  is  always  presumed 
that  "regular  way"  is  intended. 

(c)  "At  three  days,"  i.e.,  for  delivery  upon  the  third  day 
following  the  contract.  It  may  be  that  securities  may  be 
coming  from  out  of  town,  or  that  they  are  not  within  the 
immediate  control  of  the  seller  for  some  other  reason,  or  that 
the  buyer  will  not  be  in  a  position  to  accept  the  securities 


PURCHASES    AND    SALES    BOOKS 


31 


before  that  time ;  all  of  which  makes  necessary  the  specified 
bid  or  offer. 

(d)  "Buyers'  or  sellers'  options"  for  not  less  than  four 
days  nor  more  than  sixty  days.  On  such  transactions  writ- 
ten contracts  are  exchanged  on  the  day  following  the  trans- 
action, and  carry  interest  at  the  legal  rate,  unless  otherwise 
agreed ;  on  these  contracts  one  day's  notice  is  usually  given, 
at  or  before  2:15  p.m.,  before  the  securities  are  delivered 
prior  to  the  maturity  of  the  contract.  These  bids  and  offers 
are  usually  made  where  it  is  impossible  to  make  delivery  of 
or  receive  the  securities  involved  for  at  least  four  days.  This 
method  of  trading  is  greatly  in  vogue  among  brokers  who 
buy  or  sell  for  European  account. 

On  Forms  1  and  2,  illustrations  of  the  various  methods 
of  buying  and  selling  are  given.  Invariably  all  clearing 
house  items  are  "regular,"  whereas  "odd  lots"  and  bonds 
represent  largely  the  other  bids  and  offers.  Of  course,  by 
prearrangement,  stocks  which  belong  to  the  clearing  house 
division  and  which  are  coming  from  abroad,  may  be  made 
ex-clearing  house  and  subjected  to  the  rules  of  delivery  pre- 
scribed for  other  than  "regular"  transactions. 

Abbreviations  are  used  for  the  purposes  of  the  purchases 
and  sales  book.  "C."  for  cash;  "R."  for  regular  way; 
"S.  O.^"  or  "B.  0.3"  for  seller's  or  buyer's  option  at  three 
days;  "B.  O.^*"  or  "S.  O.^"  for  buyer's  or  seller's  option  at 
four  days.  Where  more  than  four  days  is  intended,  the 
exponent  indicates  the  number  of  days  allowed  for  delivery 
or  receipt  of  the  securities. 

By  writing  in  the  date  of  receipt  or  delivery  of  the  shares 
or  bonds  purchased  or  sold,  and  the  character  of  the  bid  or 
offer,  the  record  is  made  complete,  statistically.  Hence,  all 
entries  expressed  therein  are  traceable  chronologically  to  the 
succeeding  book  or  books  involved  in  the  transaction,  by 
merely  referring  to  the  date  of  settlement. 


32 


STOCK    BROKERAGE 


This  information  is  mandatory  on  the  part  of  the  broker, 
and  the  book  in  which  it  appears  is  one  of  the  many  necessary 
records  which  he  must  furnish  when  called  upon  to  do  so 
by  the  Exchange. 


J 


CHAPTER    IV      : 

THE   BLOTTERS 

*    Blotter  Entries 

After  the  transactions  have  been  recorded  in  the  pur- 
chases and  sales  books,  the  same  trades  are  written  up  or 
entered  in  either  the  "Clearing  House  Blotter"  (Form  14) 
or  the  "Ex-Clearing  House  Blotter"  (Forms  15,  16),  de- 
pending altogether  upon  the  classes  of  securities,  whether 
they  be  clearing  house  or  ex-clearing  house  issues.  Here, 
again,  this  division  facilitates  entry  and  classification  of 
securities. 

The  Blotter  as  a  Financial  Record 

In  the  stock  brokerage  business,  both  the  general  journal 
and  the  cash  book,  as  they  are  commonly  used,  are  completely 
superseded  by  the  blotter,  which  is  really  the  first  book  of  a 
financial  character.  From  it  are  posted  to  the  ledger  all 
purchases  and  sales  and  all  other  entries  involving  either 
cash,  transfers  from  one  account  to  another,  or  adjustments. 
.  It  is  the  record  which  is  in  use  throughout  the  entire  business 
day.  It  reveals  the  cash  condition  of  the  firm  and  deter- 
mines the  extent  of  borrowing  necessary  to  finance  the  trans- 
actions of  the  customers.  It  also  measures  the  lending 
capacity  of  a  firm  which,  having  too  large  a  surplus  of  cash, 
may  lend  the  same  out  "on  call."  The  auditor  will  find  that 
the  blotter,  if  well  kept,  will  furnish  every  detail  essential  to 
a  thorough  examination  of  the  broker's  operations. 

The  Principle  of  the  Blotter 

The  principle  underlying  the  operation  of  the  blotter, 

33 


34 


STOCK    BROKERAGE 


1 


which  makes  possible  the  combination  in  it  of  cash  book  and 
journal,  may  be  traced  to  its  columnar ization.  This  is  so 
arranged  and  regulated  by  usage  that  the  appearance  of  an 
entry  in  one  column  or  another,  will  indicate  immediately 
whether  cash  has  been  exchanged  in  the  transaction  or 
whether  it  is  intended  merely  to  effect  a  transfer  from  one 
account  to  another. 

When  the  broker  advances  cash  for  the  payment  of. his 
customers*  purchases,  or  when  cash  is  received  against  the 
sales  of  securities,  elements  of  commission  and  transfer  tax 
enter  into  the  transaction.  When  stocks  are  ''returned'*  or 
"called,"  an  interest  item  is  to  be  considered ;  when  money 
loans  are  liquidated,  the  same  factor  of  interest  must  be 
reflected  in  the  blotter.  Throughout,  it  will  be  observed 
that  the  special  ruling  of  the  blotter  classifies  and  character- 
izes its  entries. 

Before  taking  up  the  discussion  of  blotter  columnariza- 
tion,  another  salient  feature  which  distinguishes  the  blotter 
should  be  commented  upon.  Instead  of  the  debit  and  credit 
journal  columns  adjoining  each  other  (as  in  the  two-column 
journal),  or  appearing  upon  the  same  page,  here  the  debit 
entries  affecting  the  accounts  appear  on  the  "To  Receive" 
page  and  the  credit  items  are  removed  to  the  adjoining  or 
"To  Deliver"  page. 

Cash  Entries 

Under  the  general  principles  of  the  cash  book,  the  receipt 
of  cash  is  reflected  on  the  left  side  of  the  book,  and  the  cor- 
responding credit  is  given  to  the  account  yielding  the  benefit. 
In  the  case  of  the  blotter,  the  receipt  of  cash  is  shown  on  the 
deliver  page.  Again,  the  disbursement  of  cash,  appearing 
upon  the  right  side  of  the  cash  book,  is  reflected  on  the  re- 
ceive side  of  the  blotter.  The  idea  of  the  purchase  and  con- 
sequent charge  to  the  customer,  or  the  sale  and  credit  to  the 


THE    BLOTTERS 


35 


K 


customer,  is  paramount,  while  the  cash  receipts  or  disburse- 
ments are  considered  only  as  incidental  for  the  reason  that 
all  transactions  are  of  a  money  or  financial  nature ;  and  it  is 
presupposed  that  cash  will  be  either  received  or  paid  as  the 
circumstances  require.  To  further  clarify  this  apparent  in- 
consistency, it  may  be  said  that  custom  has  established  the 
rule  in  the  Street  that  all  purchases  and  settlements  therefor 
be  shown  on  the  receive  page  of  the  blotter ;  the  debit  in  this 
case  meaning  a  debit  to  the  customer  and  a  credit  to  cash. 
On  the  other  hand,  all  sales  and  the  subsequent  receipt 
of  cash  are  reflected  on  the  deliver  page,  and  the  credit 
so  appearing  is  a  credit  to  the  customer  and  a  charge 
against  cash. 

While  it  requires  constant  watchfulness  on  the  part  of 
the  bookkeeper  to  post  debit  and  credit  items  correctly  from 
the  ordinary  cash  book,  and  while  he  must  keep  the  principle 
constantly  before  him  that  an  item  on  the  disbursement  page 
is  to  be  read :  "Debit  account ;  credit  cash,"  the  arrangement 
of  the  blotter,  on  the  other  hand,  is  such  that  when  an  item 
appears  on  the  right-hand  page  it  means  at  once  a  credit  to 
the  account.  Thus  no  mental  process  becomes  necessary 
to  assist  in  posting  the  entry  correctly. 

Since  the  blotters  serve  as  cash  books,  it  is  necessary  for 
the  cashier  to  adopt  some  means  whereby  the  cash  balances 
at  the  close  of  a  given  day  can  be  carried  forward  to  the  suc- 
ceeding day's  blotter.  As  the  chain  of  entries  would  be 
disturbed  by  this,  the  cashier  will,  at  the  close  of  each  day's 
business,  balance  the  blotters  and  carry  forward  to  the  suc- 
ceeding day's  records  the  balance  which  appeared  at  the  close 
of  the  previous  day,  as  shown  on  Form  16.  By  this  method 
each  day's  transactions  are  complete  by  themselves,  and  only 
for  the  purposes  of  correction  are  the  entries  appearing  for 
previous  days  referred  to  again.  The  balancing  of  the  blot- 
ters is  treated  more  in  detail  in  Chapter  X. 


36 


STOCK    BROKERAGE 


THE    BLOTTERS 


The  Blotter  as  a  Barometer  of  Finance 

* 

From  what  has  been  said  in  the  preceding  paragraph,  it 
is  apparent  that  the  balance  of  cash  for  any  particular  day 
can  be  found  by  deducting  the  amount  appearing  on  the  re- 
ceive page  from  that  which  appears  on  the  deliver  page.  The 
cashier  therefore  looks  to  the  blotter  for  the  condition  of  his 
balance.  This  is  the  barometer  of  his  finances,  from  which 
he  reads  the  amount  necessary  for  immediate  purposes,  or 
what  amount  he  can  lend  on  call.  The  importance  of  this 
is  quite  apparent.  At  the  close  of  the  daily  business  the 
cashier  takes  into  consideration  the  value  of  the  purchases 
to  be  provided  for  on  the  following  day  and  the  proceeds 
which  the  sales  of  securities  will  net.  Taking  into  account 
the  present  bank  balance  or  balances,  adding  the  proceeds 
from  sales,  and  deducting  the  cost  of  purchases  to  be 
financed,  a  cash  condition  is  arrived  at  which  determines 
immediately  the  extent  of  borrowing  or  lending.  Besides,  it 
determines  the  means  of  procuring  needed  funds,  or  shows 
the  extent  to  which  excess  funds  may  be  loaned. 

Alternating  Blotters 

Where  the  single  blotter  system  is  in  operation  and  the 
volume  of  business  is  large,  the  bookkeepers  find  difficulty  in 
getting  an  opportunity  to  post  the  daily  transactions.  This 
is  due  to  the  fact  that  under  such  conditions  the  blotter  is 
balanced  at  a  very  late  hour,  and  that  as  soon  as  it  is  bal- 
anced, the  blotter  clerk  begins  to  enter  the  purchases  and 
sales,  charges  and  credits,  for  the  ensuing  day.  This  he 
does  because  it  is  absolutely  necessary  that  these  records  be 
kept  up  to  the  mark.  An  unusual  delay  will  almost 
invariably  result  in  a  loss  to  the  broker. 

In  order  to  obviate  the  disadvantages  attaching  to  the 
single  blotter  system,  many  concerns  in  the  Street  have 
adopted  the  system  of  alternating  day  blotters.  .  Under  this 


37 


» 


method  two  clearing  house  and  two  ex-clearing  house  blot- 
ters are  employed,  and  are  operated  in  such  a  manner  that 
the  transactions  of  the  preceding  day  are  conveniently  posted 
without  interruption  to  either  the  cashier's  department  or 
the  blotter  clerk.  To  this  end  the  clearing  house  trans- 
actions occurring  on  Monday  and  Wednesday  are  entered  in 
the  blotter  known  as  the  "Tuesday  and  Thursday  C.  H. 
Blotter."  All  clearing  house  listings  which  have  been  dealt 
in  on  Tuesday,  Thursday,  Friday,  and  Saturday  are  entered 
in  the  "Monday,  Wednesday,  and  Friday  C.  H.  Blotter." 

All  ex-clearing  house  items  are  treated  in  the  same  way, 
giving  rise  to  the  need  of  a  "Monday,  Wednesday,  and  Fri- 
day Ex-Blotter,"  and  another  in  which  to  write  up  the  pur- 
chases and  sales  settled  on  Tuesday  and  Thursday.  The 
ex-blotter  of  Tuesday  and  Thursday  carries  with  it  the  petty 
cash  entries  which  are  frequently  "put  through"  (posted) 
on  Saturday.  In  order,  therefore,  that  the  name  of  this 
book  shall  cover  its  purpose  fully,  it  is  usually  called  the 
"Tuesday,  Thursday,  and  Saturday  Ex-Blotter." 

Any  cash  disbursements  other  than  for  the  payment 
against  purchases,  or  cash  receipts  other  than  for  the  sale  of 
securities,  find  expression  in  the  ex-clearing  house  blotter 
in  use  the  day  on  which  the  receipt  or  disbursement  is  made. 
The  same  holds  true  of  adjustment  entries.  Thus,  the  Mon- 
day, Wednesday,  and  Friday  ex-blotter  might  contain  an 
odd-lot  purchase  made  on  Saturday,  and  under  the  same  date 
there  might  appear  an  entry  attesting  to  the  receipt  of  $500 
as  margin  from  John  Jones.  In  other  words,  cash  disburse- 
ments and  cash  receipts  are  posted  to  the  various  accounts 
concerned  upon  the  day  that  such  cash  exchanges  are  made. 

Ruling  and  Arrangement  of  the  Blotter 

The  blotter  may  be  in  the  form  of  a  loose-leaf  device,  or 
it  may  be  a  bound  book.     The  latter  is  preferable  for  the 


38 


STOCK    BROKERAGE 


reason  that,  being  both  cash  book  and  journal,  its  records 
are  permanent  and  important — too  important  to  be  exposed 
to  the  destruction  or  loss  so  easy  under  the  loose-leaf 
systems. 

It  will  be  seen,  by  referring  to  Form  3,  that  for  the  most 
part  the  descriptive  captions  of  the  blotter  columns  are  iden- 
tical with  the  headings  found  in  the  purchases  and  sales  book. 
Thus  the  history  of  any  transaction  is  doubly  given,  but  in 
the  blotter  it  is  expressed  in  financial  form ;  that  is,  the  values 
as  well  as  the  quantities  of  shares  in  a  transaction  are  given. 

Distinction  between  the  Blotters 

The  clearing  house  and  ex-clearing  house  blotters  are 
identical  as  to  form.  They  differ,  however,  in  the  uses  to 
which  they  are  put  and  in  the  method  of  balancing.  Thus 
the  ex-clearing  house  blotter  serves  for  the  recording  of  all 
the  issues  of  stocks  and  bonds  entered  in  the  ex-clearing 
house  purchases  and  sales  book,  as  stated  in  Chapter  III. 
Also  it  performs  the  additional  function  of  a  journal  in  the 
matter  of  adjustments,  and  as  a  cash  book  in  reflecting  the 
cash  receipts  and  disbursements  of  the  business.  Its  func- 
tions reach  as  far  as  controlling  the  clearing  house  items 
after  they  have  passed  through  the  usual  channel  of  clear- 
ance with  the  New  York  Stock  Exchange  Clearing  House. 
As  can  be  judged,  then,  the  clearing  house  blotter  serves 
only  for  the  entering  of  such  issues  as  come  directly  under 
the  jurisdiction  of  the  Clearing  House,  leaving  the  matter  of 
cash  exchanges  therefor  to  the  ex-clearing  house  records, 
depending  altogether  upon  which  day's  book  is  being  used. 

In  contents  as  well  as  in  use  do  these  blotters  differ. 
Taking  as  a  simple  illustration,  the  "Interest"  columns  in 
the  respective  blotters,  it  will  be  found  that  the  interest  ap- 
pearing in  the  clearing  house  blotter  will  represent  interest 
on  clearing  house  stocks  only.     This  interest  will  arise  from 


THE    BLOTTERS 


39 


r 


"returned"  or  "called"  stocks.  The  "Interest"  column  of 
the  ex-blotter  will  represent,  invariably,  the  interest  which  is 
paid  or  received  from  money  loaned  or  money  borrowed 
transactions.  With  the  clearing  house  blotter  the  main  con- 
cern is  the  return  or  call  of  stocks  use^d  for  delivery  purposes 
only.  As  explained  in  Chapter  VI,  lending  or  borrowing 
stocks  involves  the  use  of  money  upon  which  interest  is 
calculated.  In  the  matter  of  the  ex-clearing  house  record 
the  interest  arises  without  regard  to  stocks,  their  return,  or 
call. 


THE    LEDGERS 


41 


CHAPTER    V 

THE   LEDGERS 

Classification  of  Ledgers 

The  ledgers  used  in  the  stock  brokerage  business  may, 
for  the  purpose  of  division,  be  classified  as  follows : 

L  Customers  Ledger 

2.  Private  Ledger 

3.  Securities  Ledger 

4.  General  Ledger 

A  majority  of  the  brokerage  houses  combine  the  first 
and  second  of  these  ledgers  into  the  general  ledger.  How- 
ever, as  this  is  not  always  done,  the  form  and  ruling  of 
each  ledger  is  here  considered  separately. 

I.   The  Customers  Ledger 

On  the  debit  side  of  the  customers  ledger,  which  is  usu- 
ally a  loose-leaf  device,  the  following  columnar  arrange- 
ment is  the  one  commonly  employed:  "Date,"  "Explana- 
tion," "Price,"  and  "Amount"  (to  be  charged).  In  case 
of  a  purchase,  the  commission  of  1/8  of  1%  is  not  entered 
to  be  added  to  the  purchase  price,  but  is  included  as  part 
of  the  total  cost  of  the  purchase,  i.e.,  the  amount  to  be 
charged.  Thus,  in  the  purchase  of  100  shares  of  United 
States  Steel  common  at  54,  the  cost  will  appear  as  $5,412.50 
and  not  $5,400  as  might  be  expected.  In  other  words,  the 
commission  charge  is  included  in  the  cost  of  the  shares,  and 
the  total  placed  in  the  "Amount"  column.  Besides  pur- 
chases, the  interest  charges,  computed  monthly,  and  the 

40 


f 


record  of  the  "net  longs"  are  reflected  on  the  debit  side  of 
the  customer's  account.  Long  securities  represent  either 
securities  held  during  a  period  as  margin  against  other  pur- 
chases, or  as  margin  against  short  sales  and  net  purchases 
of  the  same  security. 

On  the  credit  side  of  the  account  will  appear  the  sale  of 
stocks  and  bonds;  the  delivery  of  securities  to  a  customer, 
or  for  the  account  of  the  customer  against  liquidated  bal- 
ances; also  payments  in  cash  on  account  of  margin.  "Net 
short"  securities  of  a  similar  class  will  be  brought  down  after 
balancing  the  account.  By  the  expression  "short"  is  meant 
the  selling  of  shares,  not  previously  purchased  or  held,  but 
sold  with  the  expectation  of  realizing  a  profit  through  the 
decline  in  value  of  such  shares.  The  subsequent  purchase 
of  shorts  is  known  as  "short  covering"  or  "cover." 

Hedged  Accounts 

An  account  may  be  long  and  short  at  the  same  time.  As 
an  illustration,  a  customer  may  be  long  of  Union  Pacific 
and  short  of  United  States  Steel.  Such  an  account  is  said 
to  be  "hedged."  This  expression  means  a  mixed  account, 
containing  items  reflecting  contradictions  or  opposite  ten- 
dencies. 

The  term  "hedged"  also  means  a  condition  of  an  account 
in  which  the  prominent  feature  is  the  sale  of  a  different 
security  from  the  one  "long,"  or  the  purchase  of  a  different 
security  from  the  one  "short."  The  true  purpose  behind  such 
trading  is  to  check  losses  caused  by  a  declining  market  when 
long,  or  by  an  advance  in  prices  when  short  of  the  market. 

The  status  of  some  accounts  which  will  be  found  spread 
upon  the  customers  ledger,  no  matter  which  system  is 
adopted,  will  be  quite  alarming  when  the  point  is  reached  of 
preparing  the  balance  sheet,  compiling  the  "Table  of  Equi- 
ties" (Form  24),  or  computing  monthly  interest  charges  on 


42 


STOCK    BROKERAGE 


the  customers*  accounts.  Taking  a  hypothetical  case,  let  it 
be  assumed  that  John  Wilson  purchases  100  shares  of  Steel 
at  56;  that  upon  this  purchase  he  deposits  the  sum  of  $1,000 
as  margin  (equivalent  to  ten  points).  His  debit  balance 
then  is  $4,612.50,  against  which  he  retains  an  equity  or  mar- 
gin in  his  holdings.  In  technical  parlance,  this  is  a  long 
account.  The  market  declines,  and  in  order  to  check  further 
loss  he  elects  to  sell  100  shares  of  Union  Pacific  at  157. 
After  deducting  the  usual  charge  for  commission  and  tax, 
the  proceeds  from  the  sale  of  the  Union  Pacific  are  $15,- 
685.50.  By  reason  of  this  sale,  Wilson  receives  a  credit,  and 
the  account  at  this -point  is  "hedged."  Wilson's  account  will 
then  have  a  credit  balance  of  $11,073.  This,  of  course,  is  a 
fictitious  credit,  and  this  status  of  the  account  is  explained 
by  the  statement  that  such  a  credit  exists  subject  to  certain 
short  coverings  or  disposal  of  longs. 

Wilson  has  a  margin  on  the  Steel  stock.  If  he  should 
either  deliver  the  Union  Pacific  to  his  broker,  or  cover  this 
stock,  his  account  would  again  become  one  of  like  tenden- 
cies— a  simple  account  technically  known  as  a  "long"  ac- 
count. Or  if  the  Steel  stock  should  be  sold,  the  account 
would  still  retain  the  simple  form  under  the  technical  name 
of  a  "short"  account.  In  the  latter  case  Wilson  would  re- 
tain an  equity  in  his  short  Union  Pacific  to  the  extent  of  the 
balance  of  $1,000  deposited  as  margin,  less  any  loss  or  in- 
terest charges  which  he  might  have  suffered  on  his  Steel 

stock. 

This  mixed  account  difficulty  may  be  overcome  by  set- 
ting up  separate  "short"  accounts  for  the  purpose  of  segre- 
gating short  sales  of  the  customers,  who  at  the  same  time 
are  perhaps  long  of  other  securities  as  shown  by  other 
accounts  called  "long"  accounts.  This  practice  is  the  correct 
one,  although  it  will  be  found  that  the  one  first  described  is 
the  more  commoa 


THE    LEDGERS 


43 


Objections  to  the  Hedged  Account 

Here  the  fictitious  and  misleading  results  of  the  mixed 
or  hedged  account  should  "be  pointed  out.  Besides  the  diffi- 
culty in  reading  hedged  accounts,  another  objectionable 
feature  is  the  complexity  encountered  in  the  computation  of 
interest.  As  an  illustration  of  this,  take  the  account  of 
Richard  Ross.  On  September  1,  his  account  shows  a  credit 
balance  of  $11,073,  with  100  shares  of  Union  Pacific  short 
and  100  shares  of  Steel  long.  The  purchase  price  of  the 
Steel  is  perhaps  lost  sight  of,  as  well  as  the  sales  price  of 
the  Union  Pacific,  if  the  transactions  are  of  long  standing. 
On  what  balance  is  interest  to  be  computed,  since  Ross' 
account  shows  a  false  -credit  ? 

If  Ross'  account  were  analyzed,  and  the  purchase  cost  of 
Steel  and  the  proceeds  from  the  short  sale  of  Union  Pacific 
were  again  established,  it  would  appear,  in  effect,  that  the 
broker  had  advanced  money  on  the  Steel  piu-chase  but 
had  received  no  benefit  from  the  sale  of  Union  Pacific  except 
his  commission.  Therefore,  the  account  of  Richard  Ross 
should  be  charged  with  such  interest  as  will  recompense 
the  broker  for  his  outlay.  But,  how  difficult  is  this  opera- 
tion, as  compared  with  the  ease  of  interest  calculations  when 
the  long  Steel,  upon  which  interest  is  chargeable,  appears 
in  one  account  and  the  short  Union  Pacific,  upon  which  no 
interest  is  allowed,  appears  in  another  account? 

Customers  Ledger  Not  Subsidiary  to  General  Ledger 

It  has  probably  been  assumed  that  the  customers  ledger 
is  operated  as  a  subsidiary  to  the  general  ledger,  and  that 
somewhere  in  the  latter  appears  the  controlling  accounts  for 
customers  and  creditors.  This  is  not  the  case,  however. 
While  the  customers  ledger  (if  employed)  is  in  a  sense  sub- 
sidiai^,  it  is  not  operated  under  that  principle.  The  col- 
umnarization  of  the  blotters  from  which  entries  are  posted 


44 


STOCK    BROKERAGE 


THE    LEDGERS 


45 


to  the  customers  ledger,  is  such  that  no  customers'  or 
creditors'  controlling  accounts  in  the  general  ledger  are  pos- 
sible. So,  to  all  intents  and  purposes  the  customers  ledger 
is  in  itself  a  part  of  the  general  ledger,  and  nothing  more 
than  a  device  to  make  the  general  ledger  less  unwieldy,  and 
to  make  posting  less  difficult  by  distributing  the  bookkeep- 
ing operations.  The  balance  totals  of  the  customers  ledger 
must  find  expression  on  the  trial  balance  sheet  before  the 
latter  can  be  complete  and  in  balance. 

Definition  of  "Customers" 

The  term  "customers,"  as  employed  in  the  Street,  much 
opposed  to  the  usual  interpretation,  means  a  trader — a  pur- 
chaser or  seller  of  securities  for  either  investment  or  spec- 
ulation. A  customer's  account  may  show  a  debit  balance, 
together  with  securities  long.  The  value  of  the  securities 
at  the  market  price  should  usually  exceed  the  amount  of 
the  debit  balance.  Thus,  to  the  extent  of  his  margin  the 
customer  is  a  creditor.  On  the  other  hand,  the  account  may 
show  a  credit  balance  with  securities  short.  Here,  again, 
the  "cover"  value  of  the  securities  should  be  considered  in 
order  to  determine  the  true  status  of  the  account.  Generally 
speaking,  it  is  very  difficult  to  class  the  customer  as  debtor 
or  creditor,  for  he  may  be  either  in  the  broad  sense  of  the 
term. 

2.   The  Private  Ledger 

It  is  often  advisable  to  keep  from  the  minor  clerks  who 
have  access  to  the  books,  a  knowledge  of  the  income  of  the 
concern,  the  capital  accounts  of  the  proprietors,  and  other 
vital  business  accounts.  When  this  is  so,  the  "Private 
Ledger"  is  adopted. 

If  a  private  ledger  is  kept,  the  balances  contained  in  it, 
or  their  totals,  must  appear  in  the  trial  balance. 


«i 


Notwithstanding  the  advantages  of  the  private  ledger, 
the  matters  belonging  to  it  are  often  incorporated  in  the 
general  ledger ;  this  in  response  to  the  present  decided  ten- 
dency toward  concentration  of  the  records  wherever  pos- 
sible. As  in  the  case  of  the  customers  ledger,  the  private 
ledger  is  merely  a  part  of  the  general  ledger,  separated  from 
it  for  reasons  of  expediency,  and  the  principle  of  control 
cannot  be  operated. 

3.   The  Securities  Ledger 

The  securities  or  stock  ledger,  as  the  record  is  inter- 
changeably called,  differs  in  both  use  and  form  from  the 
ordinary  stock  ledger  which  is  employed  in  mercantile  and 
corporate  enterprises.  This  particular  record  is  not  in- 
tended as  one  for  summary  purposes,  nor  is  it  a  financial 
book.  It  is  used  only  for  listing  securities  and  to  show  their 
places  of  deposit,  or  other  disposition. 

Many  forms  of  this  ledger  are  in  use,  but  its  one  under- 
lying purpose  remains  the  same,  despite  the  numerous  elab- 
orations. Its  most  common  form  is  the  loose-leaf  device, 
as  that  is  best  adapted  to  the  increasing  or  decreasing  vol- 
ume of  securities  recorded.  The  security  holdings  are  of 
such  a  diversified  nature  that  one  sheet  or  more,  as  the  case 
demands,  is  allotted  to  each  kind  of  stocks  or  bonds. 

As  far  as  it  is  possible,  the  sheets  containing  the  indi- 
vidual listings  of  a  certain  issue  of  securities  should  be 
arranged. alphabetically.     The  advantages  thus  gained  are 

self-evident. 

The  longs  on  the  left  side  of  the  ledger  represent  cus- 
tomers' holdings  or  stocks  borrowed  from  brokers  in  the 
Street.  On  the  right-hand  side  is  a  record  of  short  securi- 
ties, representing  customers'  short  sales,  together  with  a 
list  of  stocks  which  might  be  "loaned"  out  in  the  Street 
or  which  might  be  acting  as  collateral  in  bank  loans. 


46 


STOCK    BROKERAGE 


Stock  Loans 

Here  it  may  be  well  to  explain  that  the  distinction  be- 
tween collateral  in  the  case  of  bank  loans,  and  stock  loans 
in  the  Street,  depends  upon  the  intentions  of  the  lender  or 
the  borrower.  Is  it  the  intention  of  the  borrower  to  use  the 
stock  so  borrowed,  and  for  which  money  has  to  be  parted 
with,  for  the  purpose  of  delivering  the  shares  against  short 
sales  of  his  customer?  Or  is  it  his  intention  to  lend  money 
and  hold  the  stock  as  collateral  for  the  loan?  These  are 
the  questions  to  be  answered  in  determining  the  intention 
of  the  transaction.  If  the  first  question  is  answered  affirma- 
tively, then  a  true  illustration  of  the  stock  loan  is  furnished. 
If  the  second  question  is  so  answered,  then  an  illustration 
of  the  ordinary  collateral  loan  is  presented.  Banks  are  in 
the  habit  of  making  collateral  loans.  Brokers,  on  the  other 
hand,  frequently  borrow  securities,  but  only  as  they  are 
necessary  for  the  purposes  of  effecting  delivery  against  short 
sales.  The  borrowing  and  lending  of  stocks  is  more  fully 
discussed  in  Chapter  VI. 

The  Ruling  of  the  Securities  Ledger 

The  page  of  this  ledger  is  divided  in  the  center  by  a 
vertical  line,  as  shown  in  Form  4.  At  the  top  of  the  leaf 
is  inserted  the  name  of  the  security  recorded.  The  left 
side  of  the  page  is  further  subdivided  into  six  columns, 
which  are  headed  from  left  to  right  with  the  descriptive 
captions,  "Date,"  "Number  of  Shares,"  "Certificate  Num- 
ber," "By  Whom  Owned,"  "For  Whose  Account  Bor- 
rowed," and  "From  Whom  Borrowed."  On  the  right  half 
of  this  page  are  six  columns  headed,  "Date,"  "Number  of 
Shares,"  "Certificate  Number,"  "For  Whose  Account 
Short,"  "To  Whom  Loaned,"  and  "Place  of  Deposit." 

This  record  is  one  of  the  books  of  the  cashier's  depart- 
ment or  of  the  stock  clerk.    To  a  great  extent  it  operates 


\ 


THE    LEDGERS 


47 


as  a  check  upon  all  securities  which  pass  in  the  course  of  the 
day. 

Method  of  Keeping  the  Securities  Ledger 

At  any  given  time  it  should  be  possible  to  balance  the 
securities  by  adding  the  number  of  shares  of  stock  or  bonds 
represented  on  the  left  side  of  the  sheet,  and  comparing  this 
with  the  number  entered  on  the  right  side.  These  footings 
should  agree.  As  an  illustration,  if  Fred  Smith  is  long 
100  shares  of  Amalgamated  Copper,  the  date  of  receipt 
will  appear  in  the  securities  ledger  with  the  number  of 
shares,  the  description  of  the  stock — Amalgamated  Copper 
— and  the  name  of  Fred  Smith  as  owner.  (See  Form  4.)  If 
the  stock  has  been  paid  for  and  delivered  to  the  customer, 
the  record  would  thereby  be  cancelled ;  but  if  not  delivered, 
the  right-hand  side  of  the  sheet  should  reveal  the  present 
place  of  deposit.  It  will  show  that  the  stock  has  been  loaned 
in  the  Street,  or  that  it  is  serving  as  collateral  in  some  bank 
loan ;  or  else  it  might  appear  as  being  in  the  transfer  office 
of  the  corporation  awaiting  re-registration,  or  in  the  vault 
of  the  broker.  In  any  case,  excepting  the  delivery  to  Smith, 
the  shares  of  Amalgamated  Copper  on  either  side  of  the 
record  should  balance. 

Auditing  the  Securities  Ledger 

An  auditor  in  checking  the  securities  ledger  should  de- 
mand positive  proof  that  the  stock  represented  in  the  various 
customers*  accounts  tallies  with  the  book  under  inspection. 
Further,  he  should  investigate  and  determine  beyond  doubt 
that  the  stocks  as  reflected  therein  are  in  actual  existence 
in  one  of  the  four  places  mentioned.  It  is  his  duty  to  de- 
termine this. 

The  securities  ledger  is  not  a  permanent  record.  At  best 
it  is  a  temporary  memorandum  which  changes  from  day  to 


48 


STOCK    BROKERAGE 


I 


day  with  the  transactions  of  the  customers  or  with  the 
change  in  place  of  deposit  of  securities.  For  instance,  if 
John  Jones  covers  his  short  Steel,  this  change  is  reflected 
by  a  total  cancellation  or  erasure  of  the  Steel  sheet  as  far 
as  Jones  affects  it.  Also,  stock  which  is  loaned  in  the  Street 
may  find  its  way  into  a  collateral  loan  the  very  next  day; 
stock  which  is  loaned  out  might  be  called,  or  stock  which 
is  borrowed  might  be  returned.  All  this  shifting  changes 
the  stock  record  so  that  only  through  the  medium  of  "throw- 
ing back"  or  referring  to  the  blotters,  can  the  condition  of 
this  ledger  be  determined  for  a  period  which  has  passed. 

4.   The  General  Ledger 

The  general  ledger  contains  the  usual  nominal  accounts, 
the  asset  and  liability  accounts,  and  a  record  of  the  proprie- 
tors' interests.  The  contents  exclude  the  customers'  and 
the  private  ledger  accounts,  when  these  are  contained  in  the 
other  ledgers. 

The  bound-book  form  is  preferable  for  the  general 
ledger  if  a  customers  ledger  is  in  operation;  otherwise  it 
would  be  more  practical  to  use  a  loose-leaf  device.  This 
is  so  for  two  reasons :  First,  the  accounts  of  the  customers, 
by  reason  of  their  voluminous  transactions,  must  be  carried 
forward  so  often  that  the  loose  sheets  afford  the  only  prac- 
tical means  of  keeping  the  respective  accounts  intact. 
Second,  the  loose  sheets  are  desirable  because  of  the  frequent 
change  in  the  clientele  of  a  brokerage  concern,  making  the 
insertion  or  the  withdrawal  of  sheets  constantly  necessary. 

The  ruling  of  the  general  ledger  sheet  does  not  differ 
from  the  standard  ledger  ruling,  except  that  the  explanatory 
column  is  more  spacious  in  order  that  transactions  may  be 
fully  recorded. 


CHAPTER    VI 

THE   "BORROWED   AND   LOANED"   BOOKS 


i 


Lending  Stocks 

In  the  course  of  his  transactions  the  broker  frequently 
requifes  money  to  meet  stock  purchases,  and  on  the  other 
hand,  frequently  requires  stock  to  make  deliveries  against 
short  sales.  These  needs  are  usually  met  by  loaning  or 
borrowing  stock  as  the  case  may  be. 

This  borrowing  and  loaning  of  stock  is  something  pe- 
culiar to  the  Street.  After  Exchange  hours,  the  loan  crowd 
assembles  on  the  floor  of  the  Exchange.  This  group  is 
composed  of  brokers  or  their  clerks  who  have  stocks  to  loan, 
and  brokers  who  seek  to  borrow  stock  to  make  delivery 
against  short  sales,  or  for  other  purposes. 

To  illustrate  the  loan  of  stock,  suppose  a  broker  pur- 
chases 1,000  shares  of  Steel  common  on  margin  for  a  cus- 
tomer. As  the  customer  has  only  put  up  10%  or  such 
other  marginal  amount  as  the  broker  may  require — or  in 
the  case  of  a  credit  customer,  has  put  up  nothing  at  all — 
the  responsibility  of  financing  the  transaction  falls  mainly 
upon  the  broker.  Under  the  rules  of  the  Street  the  pur- 
chased stock  will  be  delivered  the  next  day.  In  the  case  of 
the  Steel  common,  as  it  is  a  clearing  house  stock,  delivery 
will  be  made  by  the  broker  designated  by  the  Clearing  As- 
sociation. If  it  were  not  a  clearing  house  stock,  delivery 
would  be  made  by  the  broker  from  whom  it  was  purchased. 
In  either  case  the  purchasing  broker  must  be  prepared  to 
give  his  check  to  the  delivering  broker  the  -same  day  the 
delivery  is  made,  i.e.,  the  business  day  following  the  making 
of  the  contract. 

49 


50 


STOCK    BROKERAGE 


U 


If  the  broker  has  available  funds,  the  question  of  paying 
for  his  stock  is  merely  a  matter  of  drawing  his  check.  If, 
however,  his  own  funds  are  not  available,  he  has  two  courses 
open  to  him :  First,  he  can  borrow  the  money  from  the  bank 
on  collateral.  Second,  he  can  borrow  the  money  on  the 
Street  from  one  in  need  of  the  shares. 

It  is  usually  more  expedient  to  borrow  money  by  lending 
stocks  to  the  Street  than  it  is  to  employ  the  bank  for  that 
purpose  through  the  means  of  a  collateral  loan.  In  the  first 
case  full  market  value  is  received ;  in  the  latter  from  60  to 
80%  of  the  value  is  obtained,  not  to  mention  the  ease  of 
lending  stocks  to  the  Street,  and  the  inconvenience  of  bor- 
rowing from  the  bank. 

If  it  be  a  clearing  house  issue,  then  all  the  lending  broker 
does  is  to  exchange  tickets  with  the  borrower  of  the  stock, 
and  the  transaction  assumes  the  aspect  of  a  sale  and  purchase, 
and  the  Clearing  House  merely  offsets  the  purchase  of  the 
Steel  in  this  case,  against  the  loan  of  the  Steel.  The  amount 
involved  in  the  transaction  almost  approximates  the  cost 
price  of  the  shares,  so  that  the  lender  of  the  stock  pays  or 
receives  the  difference  between  such  cost  price  and  the  clear- 
ing house  price* — an  arbitrary  figure  established  each  night 
by  the  Clearing  House  to  settle  transactions  of  which  lending 
and  borrowing  stocks  are  typical. 

However,  if  the  stock  to  be  loaned  is  ex-clearing  house, 
the  matter  is  a  little  more  difficult  to  arrange.  Then  the 
loaning  broker — who  is  the  purchasing  broker  in  the  case  of 
the  1,000  shares  cited — either  makes  his  arrangements  to 
deliver  the  shares  loaned  upon  the  following  business  day, 
or  he  endeavors  to  lend  the  stock  before  2:15  p.  m.  on  the 
delivery  day.  If  he  cannot  do  either,  he  must  arrange  to 
borrow  the  money  through  the  medium  of  a  collateral  loan. 

•See  Chapter  IX. 


THE   "BORROWED  AND  LOANED"   BOOKS 


51 


\ 


A  question  might  arise  as  to  how  the  broker  is  able  to 
receive  the  purchased  securities  in  the  last  cited  instance  and 
deposit  the  same  as  collateral  in  order  to  raise  the  funds  to 
pay  the  seller  or  the  broker  delivering  such  stocks  or  bonds. 
The  broker  delivering  does  not  wait  for  payment  from  the 
receiving  broker  longer  than  the  time  necessary  in  which  to 
draw  the  check.  How  then  is  this  question  to  be  answered  ? 
Through  an  arrangement  with  the  bank  with  which  the 
broker  does  business  he  is  able  to  have  his  checks  honored, 
or  what  is  equivalent  to  being  over-certified;  such  over- 
certification  or  overdraft  to  be  made  good  by  the  broker  with 
the  funds  received  from  pledging  his  securities  or  lending 
them  to  the  Street. 

At  this  point  the  broker  has  bought  his  stock  but  has 
deposited  it  as  collateral  for  the  money  with  which  it  was 
purchased.  He  may  call  for  his  stock  at  any  time,  but  must, 
of  course,  pay  back  the  money  borrowed  on  its  security  with 
interest.  On  the  other  hand,  the  broker  or  bank  which 
loaned  the  money,  may  in  turn  call  for  its  repayment,  with 
accrued  interest,  and  when  paid  the  collateral  is  returned. 
In  case  of  a  call  for  the  money,  the  broker  on  the  opposite 
side  of  the  transaction  can  usually  relend  his  stock  or  pledge 
it  as  collateral  in  a  bank  loan,  and  thus,  as  far  as  he  is  con- 
cerned, leave  the  whole  matter  in  statu  quo. 

The  matter  is  usually  kept  in  this  shape  until  the  cus- 
tomer orders  the  stock  sold.  Then  the  broker  makes  the  sale, 
and  demands  the  return  of  the  shares  loaned,  upon  payment 
of  the  amount  borrowed  thereon  and  interest.  The  stock  so 
redeemed  is  delivered  to  the  purchaser  and  the  transaction  is 
complete  as  between  the  brokers. 

Borrowing  Stocks 

Another  transaction  usually  handled  through  the  loan 
crowd  is  the  short  sale.    The  customer  instructs  his  broker 


52 


STOCK    BROKERAGE 


i 


to  sell  short,  which,  were  it  not  for  the  rules  of  the  Stock 
Exchange,  would  be  nothing  more  or  less  than  a  sale  at  the 
market  price  for  future  delivery,  The  Stock  Exchange, 
however,  requires  that  when  a  sale  is  made,  delivery  of  the 
stock  sold  shall  be  made  not  later  than  the  following  day. 
To  meet  this  requirement — while  still  making  the  profit  or 
loss  resulting  from  the  "short"  transaction — ^the  customer 
puts  up  a  margin  to  protect  the  broker,  and  the  broker  then 
makes  an  actual  sale  at  the  market,  borrowing  stock  and 
delivering  it  to  the  purchaser  the  following  day  against 
payment  of  the  purchase  price.  The  borrowed  stock  stands 
in  this  condition  until  the  customer  orders  his  short  sale 
covered.  This  means  that  the  stock  borrowed  and  sold  on 
his  account  is  to  be  returned.  The  broker  then  buys  the 
stock  in  at  the  market  and  returns  it  to  the  party  from  whom 
it  w^as  borrowed.  If  the  price  of  stock  has  declined  mean- 
while, the  customer  reaps  the  profit  between  the  price  at 
which  the  stock  was  sold  and  the  price  at  the  time  the  sale 
is  covered,  less  the  broker's  charges.  If  the  price  of  the 
stock  has  advanced,  he  loses  the  difference  between  the  price 
at  which  he  sold  and  the  price  at  the  time  of  covering,  plus 
the  broker's  charges. 

The  Advantages  of  Borrowing  and  Lending 

To  repeat,  lending  stocks  on  the  Street,  which  is  equiva- 
lent to  borrowing  money  on  collateral,  is  a  very  advan- 
tageous arrangement  for  the  broker  who  wishes  money, 
inasmuch  as  he  then  borrows  to  the  full  market  value, 
whereas  if  he  pledged  the  same  securities  as  collateral  at  his 
bank,  he  would  receive  but  from  60  to  80%  of  their  value. 
Further,  the  rate  of  interest  on  money  loaned  on  stocks  on 
the  Street  is  usually  lower  than  the  rate  required  by  banks 
for  the  use  of  demand  money. 

The  rate  of  interest  charged  for  money  advanced  on 


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t 


borrowed  securities  approximates  the  rate  charged  in  the 
call  money  market,  but  is  really  measured  by  the  demand 
for  and  supply  of  the  particular  stock.  Thus  the  broker 
seeking  to  borrow  specified  stocks  for  the  purpose  of  making 
delivery  against  a  short  sale  of  his  customer,  must  primarily 
consider  the  necessity  of  procuring  the  shares.  Hence,  he 
is  not  in  a  position  to  bargain  too  closely  as  to  the  rate  of 
interest  nor  to  object  to  advancing  the  full  value  in  money, 
because  he  must  have  the  stock.  This  is  advantageous  for 
the  broker  lending  stocks,  and  particularly  so  when  the 
market  is  oversold,  because  he  can  then  charge  a  premium 
on  the  stocks  loaned.  Thus  a  year  or  so  ago  when  the  New 
York,  New  Haven  &  Hartford  shares  developed  such  a 
short  interest  in  the  market,  those  who  held  the  floating 
supply  were  in  a  position  to  charge  a  premium  ranging  from 
1/64  to  1/16%  per  day  to  borrowers  of  this  stock. 

Mark-Down  and  Mark-Up 

The  "mark-down"  (market  down)  and  the  "mark- 
up" (market  up)  are  transactions  which  are  frequently 
made  in  connection  with  stocks  borrowed  or  stocks 
loaned.  It  is  the  custom  among  brokers  to  keep  all  stock 
loans  at  the  market  price;  that  is,  the  money  advanced  or 
received  for  stocks  borrowed  or  loaned  must  be  kept  at  the 
market  value  of  the  stock.  For  example,  suppose  that  Jones 
&  Co.  borrowed  from  Smith  &  Co.  100  shares  of  Steel  at 
60,  and  that  subsequently  the  value  of  these  shares  declined 
10  points.  In  such  a  case,  Jones  &  Co.  would  request  Smith 
&  Co.  to  send  the  former  firm  a  check  for  $1,000  and  also 
interest  on  the  loan  from  the  time  of  borrowing  until  ad- 
justed to  the  market  value.  This  transaction  is  called  a 
"mark-down,"  and  a  new  entry  under  this  date  is  made  in 
the  stocks  borrowed  and  loaned  book  of  Jones  &  Co.,  thereby 
constituting  a  new  transaction.    The  converse  of  this  opera- 


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54 


STOCK    BROKERAGE 


I 


tion  is  known  as  a  "mark-up,"  and  would  take  place  if  the 
price  of  Steel  increased,  say  to  75,  instead  of  declining  to 
50.  This  time,  however.  Smith  &  Co.  would  issue  the 
"mark-up"  and  request  a  check  from  Jones  &  Co.  for 
$1,500. 

Stocks    Borrowed    and    Loaned    Book — Its    Ruling    and 
Arrangement 

The  stocks  borrowed  and  loaned  book  is  an  underlying 
record  supporting  the  ledger  accounts  "Stocks  Borrowed" 
and  "Stocks  Loaned." 

The*book  is  usually  a  bound  one.  It  is  divided  into  two 
sections,  the  one  devoted  to  the  record  of  borrowing  transac- 
tions (Form  5a),  and  the  other  to  lending  transactions 
(Form  5b).  The  column  headings  from  left  to  right  of  the 
"Borrowed"  section  are  as  follows :  "Date,"  "From  Whom 
Borrowed,"  "Number  of  Shares,"  "Description,"  "Price" 
(at  which  borrowed,  usually  the  market  or  clearing  house 
price),  and  "Date  of  Return."  Then  follow  columns  for 
the  days  of  the  calendar  month,  in  which  appear  the  interest 
rates  from  day  to  day  on  the  stocks  borrowed.  The  interest 
rate  is  either  renewed,  increased,  or  decreased  daily,  de- 
pending altogether  upon  the  prevalent  rates  at  which  stocks 
are  lending  or  renewing. 

The  "Loaned"  section  of  this  record  is  identical  in  ar- 
rangement with  the  "Borrowed"  section,  with  the  one  ex- 
ception that  the  second  column  is  headed  "To  Whom 
Loaned." 

Checking  the  Record 

As  a  check  upon  the  stocks  borrowed  and  loaned  book, 
recourse  may  be  had  to  the  securities  ledger  already  de- 
scribed. The  money  values  involved  in  the  stocks  borrowed 
and  stocks  loaned  should  be  reconcilable  with  the  general 


ledger  accounts  bearing  the  captions  "Stocks  Borrowed," 
"Stocks  Loaned." 

Money  Borrowed  and  Loaned  Book— a  Record  of  Collateral 

It  has  been  observed  that  the  stocks  borrowed  and  loaned 
book  is  intimately  related  to  the  financing  of  transactions 
through  the  lending  or  borrowing  of  securities  in  the  Street. 
As  has  been  illustrated,  a  broker  can  also  obtain  funds  by 
means  of  the  ordinary  bank  loan,  giving  securities  as  col- 
lateral. He  can  also  lend  his  excess  funds  upon  call  or 
demand,  taking  securities  as  collateral  for  the  loan. 

Borrowing  money  from  the  bank  or  from  any  other 
source  upon  collateral  securities,  or  loaning  money  upon 
call  gives  rise  to  the  need  for  another  record  which  will  give 
expression  to  such  transactions.     The  "Money  Borrowed 
and  Loaned  Book"  (Forms  6a  and  6b)  fulfils  this  purpose. 
The  book  is  similar  in  arrangement  to  the  stocks  borrowed 
and  loaned  book,  which  has  just  been  explained.    It  shows 
the  date  of  the  borrowing  or  lending,  the  amount  involved 
in  the  transaction,  from  whom  borrowed  or  to  whom  loaned, 
a  list  of  the  collateral  given  for  the  loan,  the  rate  of  interest, 
date  paid,  ahd  provides  by  means  of  a  special  column  for  the 
record  of  any  other  stock  substituted  for  that  originally 
pledged.     As  such  loans  are  usually  call  loans  upon  which 
the  rates  of  interest  fluctuate  from  day  to  day,  provision 
must  be  made  for  a  reflection  of  such  rate  changes.    A  glance 
at  Forms  6a  and  6b  will  show  how  this  is  done,  the  arrange- 
ment adopted  being  the  same  as  that  used  in  the  stocks  bor- 
rowed and  loaned  book. 

Collateral  Substitutions 

The  use  of  the  "Substitution"  column  of  the  money  bor- 
rowed and  loaned  book  is  illustrated  by  the  following  trans- 
action : 


t. 


y 


i!l 


c5  STOCK    BROKERAGE 

Assume  that  the  brokerage  house  of  Smith  &  Co.  pledges 
500  shares  of  Steel  common  (market  price  54)  and  500 
shares  of  Amalgamated  Copper  (market  price  70)  to  secure 
a  loan  of  $50,000 ;  and  that  the  500  Steel  shares  so  pledged 
really  belong  to  a  customer  of  Smith  &  Co.  The  customer 
later  sells  his  500  shares  of  Steel  common,  and  Smith  &  Co. 
must  then  deliver  the  500  Steel  to  the  purchaser.  In  such 
a  case  they  will  seek  to  substitute  other  securities,  the  value 
of  which  approximates  $27,000,  as  collateral,  in  order  that 
the  Steel  may  be  released  for  delivery  against  the  sale.  The 
lender  is  usually  willing  to 'accept  stock  of  approximate  value 
and  rating,  in  place  of  the  securities  which  the  borrower 
seeks  to  withdraw,  and  Smith  &  Co.  having  purchased  300 
shares  of  Baltimore  &  Ohio  common,  valued  at  about 
$28,000,  will  be  enabled  to  effect  a  substitution  of  stock  by 
depositing  the  Baltimore  &  Ohio  shares  in  lieu  of  the  Steel. 
In  the  event  of  a  substitution,  the  stock  withdrawn  is 
checked  on  the  money  borrowed  and  loaned  book  to  indi- 
cate such  withdrawal,  and  the  substituted  shares  are  entered 
in  the  "Substitution*'  column. 

Payment  of  Loan  and  Return  of  Securities 

In  the  -case  of  payment  of  a  money  loan,  the  date  of 
liquidation  is  written  across  the  face  of  the  page,  thus  at- 
testing to  the  fact  that  the  loan  has  been  cancelled  and  the 
released  securities  returned. 

Relation  of  Money  Borrowed  and  Loaned  Book  to  Other 
Books 
At  this  point  reference  should  again  be  made  to  the 
securities  ledger  (Form  4)  to  trace  the  connection  between 
it.and  the  money  borrowed  and  loaned  book.  In  speaking  of 
that  ledger,  it  will  be  recalled  that  the  position  or  place  of 
deposit  of  the  securities  was  emphasized.    Consequently,  the 


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securities  appearing  in  the  "Money  Borrowed"  section  of 
Form  6  are  traceable  to  the  securities  ledger.  When  sub- 
stitutions are  made,  the  fact  will  also  be  borne  out  by  this 
ledger.  Taking  the  hypothetical  case  given  above,  the  Bal- 
timore &  Ohio  shares  would  probably  have  been  taken  from 
the  safe  deposit  vault  and  substituted  in  the  bank  loan ;  while 
the  Steel  shares,  constituting  part  of  the  original  collateral 
in  the  loan  and  which  were  subsequently  withdrawn,  would 
be  erased  from  the  securities  ledger,  and  the  blotter  re- 
cording the  sale  and  a  record  of  their  delivery  to  the  pur- 
chaser would  vouch  for  their  final  disposition. 

However,  taking  the  "Money  Loaned"  section  of  the 
money  borrowed  and  loaned  book,  the  securities  appearing 
therein  as  collateral  do  not  find  expression  in  the  securities 
ledger,  for,  while  they  are  in  the  pledgee's  hands,  in  no  way 
is  it  intended  that  either  their  position  or  ownership  shall 
be  recorded  among  the  securities  owned.  The  stocks  or 
bonds  acting  as  security  for  a  loan  are  the  property  of  the 
pledger,  subject,  of  course,  to  the  rights  and  equities  of  the 
pledgee. 

The  accounts  in  the  general  ledger,  under  the  captions 
of  "Money  Borrowed"  and  "Money  Loaned,"  exercise  a 
check  on  the  money  values  representative  of  the  borrowing 
or  lending  operations. 


Ij 


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I 

I 


CHAPTER    VII 

CUSTOMERS    STOCK   MARGIN   RECORD 

Trading  on  Margin 

Stock  trading  is  for  the  most  part  done  on  margin;  i.e., 
the  customer  deposits  with  his  broker  a  part  of  the  purchase 
cost.  To  gain  a  clearer  idea  of  the  margin  system,  this  mar- 
ginal deposit  may  be  regarded  as  an  instalment  on  the  stock, 
or  as  a  payment  on  account  of  an  option.  The  system  of 
margins  allows  the  trader  to  carry  a  large  line  of  securities 
on  a  comparatively  moderate  cash  capital,  with  the  result 
that  his  returns  are  much  greater  than  they  could  be  if  he 
were  required  to  pay  the  whole  purchase  price.  To  illus- 
trate, if  he  deposits  a  ten-point  margin  on  a  stock  selling  at 
par,  he  can  carry  ten  times  as  much  stock  as  he  could  if  he 
had  to  pay  the  full  purchase  price,  and  his  profits  or  losses 
are  correspondingly  increased. 

The  Margin  Record 

The  "Customers  Stock  Margin  Record"  is  probably  the 
most  carefully  watched  of  all  the  broker's  books.  It  should 
show  at  all  times  the  status  of  the  customer's  account, 
whether  it  be  long,  short,  or  hedged.  If  stocks  fall,  it  shows 
when  and  to  what  extent  more  margin  must  be  called.  Or 
if  a  customer  is  operating  on  a  credit  extension  allowed  him 
by  the  broker,  it  shows  just  how  far  this  has  gone,  and  how 
nearly  the  customer  has  reached  his  limit.  If  the  margin 
book  is  not  closely  watched,  the  neglect  may  cause  the  broker 
heavy  personal  loss. 

The  record  of  margins  in  operation  may  be  adequately 

58 


.7 


CUSTOMERS    STOCK    MARGIN    RECORD 


59 


kept  either  by  means  of  a  loose-leaf  book,  or  by  a  card  sys- 
tem. Forms  7  and  8  show  the  usual  style  of  margin  card ; 
while  Form  9  gives  the  loose-leaf  margin  sheet,  showing  its 
operation. 

The  margin  record,  whether  it  be  the  loose-leaf  or  card 
system,  should  be  arranged  to  show  at  a  glance  the  name 
of  the  account ;  the  number  of  shares,  long,  short,  or  hedged; 
the  description  of  such  shares ;  the  net  price  (including  com- 
mission) ;  the  market  price  of  such  stocks;  any  losses  or 
gains  thereon  (by  comparison  of  market  price  and  cost 
price)  ;  the  margin  deposit ;  and,  either  in  points  or  per- 
centages, the  margin  remaining  to  carry  such  commitments. 
It  is  essential  that  all  these  facts  be  presented,  quickly,  sys- 
tematically, and  logically. 

The  loose-leaf  margin  record,  which  is  the  more  prac- 
tical and  convenient  of  the  two  methods  in  use,  should  be 
so  arranged  that  each  section  of  accounts  will  be  in  alpha- 
betical sequence.  In  a  widely  fluctuating  market  the  merits 
of  the  loose-leaf  device  will  be  evident.  The  card  system 
carries  with  it  the  usual  liability  of  the  destruction  or  mis- 
placement of  the  cards  when  most  needed. 

Marginal  Requirements 

The  usual  marginal  requirements  are  ten  points  on  the 
number  of  shares  held.  Frequently,  a  percentage  of  the  cost 
value  will  be  required,  but  this  depends  altogether  upon  the 
policy  of  the  broker  or  the  nature  of  the  stock  carried — 
whether  highly  speculative  or  otherwise.  In  the  event  of  a 
hedged  account,  the  requirements  might  be  less.  Thus,  a 
margin  of  $1,000,  or  ten  points,  would  usually  be  required 
on  an  account  long  100  shares  of  Steel  or  short  100  shares 
of  Union  Pacific.  A  margin  of  five  points  would,  however, 
more  than  cover  the  requirements  of  a  hedged  account  long 
100  shares  of  Steel  and  short  100  shares  of  Union  Pacific. 


I 


60 


STOCK    BROKERAGE 


Operation  on  Credit  Extension 

When  a  customer  is  operating  in  the  market  upon  a  credit 
extension  allowed  him  by  the  broker,  the  amount  of  such 
credit  is  in  no  way  regulated  by  contract.  The  broker  usu- 
ally carries  the  account  up  to  a  point  where  a  considerable 
sum  is  owing,  or  until  in  his  judgment  he  requires  additional 
funds  with  which  to  finance  these  holdings,  when  he  will 
make  a  demand  upon  the  customer  for  a  sufficient  sum  to 
adjust  the  account  to  market  values. 

To  illustrate,  a  wealthy  client  places  an  order  with  his 
broker  for  5,000  shares  of  Steel  preferred,  which  are  pur- 
chased at  107.  On  this  commitment  no  margin  is  required, 
and  it  is  incumbent  upon  the  broker  to  finance  the  transac- 
tion. The  price  of  Steel  preferred  declines  to  102.  This 
means  a  paper  loss  to  the  customer  of  $25,000.  In  some  way 
the  broker  must  make  up  this  difference,  either  by  depositing 
additional  collateral  if  he  has  borrowed  at  his  bank,  or  by 
receiving  a  mark-down  if  he  has  made  a  stock  loan.  If  he 
has  a  sufficient  supply  of  capital,  it  will  not  be  necessary  for 
him  to  issue  a  margin  call  to  his  customer.  On  the  other 
hand,  if  the  broker  is  short  of  capital,  he  will  make  a  margin 
call,  receiving  from  his  client  securities  whose  market  value 
approximates  $25,000  and  which  could  be  pledged,  or  else 
he  will  be  given  a  check  to  cover  the  difference  in  values. 

Operation  on  a  Cash  Margin 

All  other  accounts,  including  those  of  the  operator,  spec- 
ulator, or  small  trader,  must  be  carefully  watched  in  order 
to  know  when  the  calling  point  for  additional  margin  is 
reached,  or  to  ascertain  the  standing  of  the  account  after 
added  lines  have  been  taken  on.  In  other  words,  it  must 
be  determined  if  the  account  is  well  enough  margined  to 
allow  an  increased  interest  in  the  market,  either  long  or 
short. 


CUSTOMERS    STOCK    MARGIN    RECORD 


61 


To  illustrate,  let  it  be  assumed  that  a  customer  purchases 
100  shares  of  Steel  common  at  56 ;  that  upon  this  transaction 
he  deposits  the  usual  ten  points,  or  $1,000.  His  margin 
sheet  would  reflect  this  purchase.  If  the  market  price  of 
Steel  remained  unchanged,  the  customer  would  retain  his 
equity  of  $1,000  less  commission  on  the  transaction.*  As- 
suming, however,  that  the  price  of  Steel  declines  to  51,  the 
account  or  condition  of  margin  would  reflect  an  equity  of 
only  $500,  since  the  loss  at  the  market  price  consumed  the 
other  portion  of  the  margin  deposited.  On  the  other  hand, 
if  the  value  of  Steel  had  risen  to  61,  the  equity  or  margin 
would  be  increased  to  15  points  or  $1,500. 

Throughout  the  study  of  margins,  it  will  be  found  that 
for  the  most  part  it  is  one  of  constant  watchfulness  on  the 
part  of  the  broker.  When  a  decline  occurs,  the  customer 
must  be  asked  for  additional  margin  in  order  that  the  con- 
dition of  his  account  may  be  improved  and  the  margin  on 
his  securities  be  brought  up  to  the  proper  percentage  of  the 
market  prices.  The  vital  importance  of  this  matter  is  illus- 
trated in  treating  "Equity  Tables"  in  Chapter  XIV. 

Selling  at  a  price  which  will  prevent  loss  to  the  broker 
or  his  customer  is  called  a  "stop-out."  Thus,  if  the  customer 
overlooks  a  call  for  margin,  it  frequently  results  in  a  loss 
of  the  entire  margin  he  already  has  up,  and  in  such  case  he 
is  sold  or  "stopped  out."  This  saves  the  broker,  but  if  he 
delays  the  sale  too  long  it  may  result  in  a  financial  loss  to 
him.  Thus,  if  the  price  of  Steel  bought  on  margin  at  56, 
declined  to  44,  it  would  be  beyoiid  the  exhaust  point,  and  not 
only  would  all  margin  be  lost,  but  the  broker  would  himself 
incur  a  two-point  loss.  The  account  would  then  be  in  a  con- 
dition of  minus-equity — a  true  type  of  a  "doubtful  account 
receivable"  of  the  broker. 


*A  commission  of  1/4%  is  immediately  added  to  the  cost,  making  the  net 
cost  as  reflected  by  the  margin  sheet,  56 1/4,  this  representing  the  commission 
both  ways — ^purchase  and  sale. 


m 


I 


CHAPTER    VIII 

MISCELLANEOUS    STOCK    RECORDS;    ORDER 

OF  ENTRY 

Stock  Transfer  Register 

If  a  dividend  on  stock  should  be  declared  and  the  transfer 
books  be  closed  for  a  certain  number  of  days  before  pay- 
ment, as  is  usually  the  case,  the  broker  purchasing  such 
stock  meanwhile  would  be  prevented  from  transferring  it 
to  his  own  name  or  the  name  of  his  customer.  The  one  in 
whose  name  the  stock  is  registered  will  then  receive  the  divi- 
dend check.  Thus  the  "selling"  broker,  or  holder  of  record, 
becomes  a  collecting  agent  for  the  purchasing  broker  in  the 
matter  of  the  dividend.  For  this  service  a  collection  charge 
of  1%  is  frequently  made.  To  escape  this  charge,  and  to 
insure  the  prompt  and  proper  receipt  of  dividends  or  interest, 
it  is  considered  good  policy  to  transfer  stocks  or  registered 
bonds  into  the  name  of  the  holder,  wherever  possible. 

The  "Stock  Transfer  Register"  (Form  10)  serves  to 
record  all  stocks  in  the  process  of  transfer.  It  also  becomes 
a  subsidiary  record  of  the  securities  ledger,  giving  detailed 
information  as  to  the  date  of  deposit  of  securities  with  the 
transfer  office,  the  date  of  withdrawal,  the  certificate  num- 
bers of  the  shares  deposited  and  received,  and  the  list  of  the 
securities  in  transfer.  The  securities  ledger  classifies  by 
means  of  an  alphabetical  arrangement,  while  the  transfer 
register  groups  the  items  under  dates  of  deposit  and  with- 
drawal. By  its  arrangement  it  reveals  at  a  glance  just  what 
stock  has  been  transferred,  what  has  been  withdrawn,  and 
what  is  still  on  hand  at  the  transfer  offices. 

62 


MISCELLANEOUS    STOCK    RECORDS 


63 


The  Vault  List 

In  many  of  the  brokerage  offices  a  record  called  a  "Vault 
List"  (Form  11)  is  kept  to  record  the  securities  in  the  vault. 
This  record  is  also  subsidiary  to  the  securities  ledger. 

The  auditor  will  find  it  convenient  to  have  this  vault  list 
when  the  point  of  reconciling  the  stocks  on  deposit  is 
reached.  He  should  not,  however,  depend  upon  the  vault 
list,  but  should  personally  examine  all  securities  in  the  safe 
deposit  box  and  keep  record  of  all  changes  which  take  place 
in  the  course  of  the  day. 

Revenue  Tax  Register 

By  the  New  York  State  law  which  became  effective 
June  30,  1905,  all  shares  of  stock  sold  or  transferred  were 
made  subject  to  a  tax  of  2  cents  per  share,  regardless  of  par 
value.  This  law  was  subsequently  amended  so  that  the 
revenue  at  the  present  time  is  but  2  cents  on  each  $100  par 
value  of  stock  transferred.  The  transfer  offices,  however, 
seldom  requested  the  production  of  the  stamps  in  effecting 
transfers,  and  the  law  was  frequently  evaded  by  using  can- 
celled stamps  to  cover  more  than  one  transfer.  To  remedy 
this,  an  act  was  passed  which  made  it  compulsory  for  stock 
brokers  to  record  all  transfers,  either  through  sale  or  re- 
registration.  The  face  value  of  the  stamps  used  therefor 
must  also  be  stated.  The  book  in  which  these  entries  are 
made  is  called  the  "Revenue  Tax  Register"  and  is  shown  in 
Form  12. 

The  revenue  tax  register  provides  space  for  the  date 
of  either  sale  or  transfer  of  stock ;  the  name  of  the  stock ; 
the  number  of  shares  (the  quantity  rather  than  the  serial 
number  of  the  certificate)  ;  face  value  (par  value  of  the 
shares)  ;  and  name  of  purchaser  or  transferee.  The  latter 
calls  for  the  name  of  the  purchasing  broker  or  the  person 
to  whose  name  the  certificates  are  transferred. 


64 


STOCK    BROKERAGE 


The  special  columns  on  the  right  of  the  revenue  tax 
register  are  for  the  statement  of  the  number  and  face  value 
of  the  stamps  used,  and  are  designed  to  prevent  the  double 
use  of  transfer  stamps. 

Petty  thieving  of  revenue  stamps  was  not  uncommon  in 
the  early  days  of  the  tax — something  made  possible  by  the 
system  then  in  use,  as  no  record  of  a  probing  nature  was 
ever  kept.  The  present  revenue  tax  register — which  is  re- 
quired by  law — has  overcome  this  tendency  by  providing 
the  data  for  a  checking  inventory  of  such  stamps.  The  con- 
sumed revenue  stamps  recorded  by  this  register  gives  the 
consumption  figure.  Adding  this  to  the  physical  inventory 
of  stamps,  the  result  should  reflect  the  amount  charged  to 
the  Revenue  Stamps  account  in  the  general  ledger  at  the 
beginning  of  the  period. 

Solicitors'  Production  Record 

Where  many  solicitors  are  employed,  it  is  necessary  to 
keep  a  memorandum  book  of  some  sort  which  will  reflect 
the  margin  of  profit  under  which  the  solicitors  are  operat- 
ing. Form  23  shows  the  form  of  solicitors'  production 
record  commonly  used.  This  record  should  be  so  kept  as 
to  give  a  monthly  review  of  each  solicitor's  commission- 
producing  activities.  Opposed  to  the  solicitor's  earnings 
for  the  house,  is  the  amount  of  expense  incidental  to  his 
employment,  such  as  salaries,  entertainment,  and  traveling 
expenses.  As  all  contracts  between  a  firm  and  a  solicitor 
cover  at  least  the  period  of  one  year,  the  record  of  business 
as  shown  by  this  memorandum  book  is  valuable  in  consider- 
ing the  renewal  of  contracts. 

ORDER  OF  ENTRY 

Having  examined  into  the  books  of  account  and  the 
underlying  records  used  in  brokerage  accounting,  it  will 


ORDER    OF    ENTRY  gj- 

be  well  to  discuss  for  a  moment  the  sequence  or  order  in 
which  transactions  are  recorded. 

Purchases  and  sales  are  passed  first  through  the  pur- 
chases and  sales  book.  At  the  same  time  the  proper  entries 
are  made  in  the  customers  margin  record.  These  are  but 
pencil  memoranda  which  trace  the  fluctuations  on  a  given 
stock  following  its  purchase  or  sale.  If  this  were  entered 
at  a  later  time  in  the  day,  the  chances  are  that  some  of  the 
customer's  margin  might  be  well  spent,  making  further 
call  necessary  before  the  close  of  the  day. 

The  financial  end  of  the  transaction  is  now  ready  for 
entry  in  the  blotter.  If  the  customer  deposits  his  margin 
upon  the  day  of  his  commitment  in  the  market,  as  is  usually 
the  case,  then  the  ex-clearing  house  blotter  of  that  day  will 
evidence  the  fact  by  reflecting  an  appropriate  credit.  If, 
however,  the  transaction  is  of  a  clearing  house  nature  and 
comes  within  the  jurisdiction  of  the  clearing  house  settle- 
ment, the  clearing  house  blotter  will  express  the  transaction 
financially,  and  the  item  will  be  posted  to  the  customer's  ac- 
count the  next  day.  For  instance,  assuming  that  a  purchase 
of  clearing  house  nature  was  made  on  Thursday,  July  15, 
then  the  clearing  house  blotter  of  Friday,  July  16,  will  con- 
tain a  record  of  the  transaction.  On  July  16,  the  stock 
would  be  received  through  the  Clearing  House  and  funds 
would  be  paid  to  the  broker  whom  the  Clearing  House  desig- 
nated as  the  delivering  broker.  This  would  necessitate  an 
entry  in  the  ex-clearing  house  blotter  of  July  16,  attesting 
to  the  receipt  of  the  shares  and  the  parting  with  money. 
Of  course,  in  this  example  it  is  supposed  that  the  transaction 
is  entirely  financed  by  the  purchasing  broker. 

To  carry  the  illustration  further,  assume  that  the  stock 
is  taken  to  the  vault  and  proper  entry  is  then  made  on  the 
vault  list  and  in  the  securities  ledger.  The  latter  record 
recites  the  condition  of  the  holdings,  showing,  say,  that  100 


66 


STOCK    BROKERAGE 


^^^l^^  ^^  ^  certain  named  stock  were  bought  for  the  account 
of  "X,"  naming  the  vault  as  the  place  of  deposit.  If  the 
stock  had  been  transferred,  the  transfer  stock  register  would 
attest  the  fact.  If  the  stock  was  pledged  as  collateral,  then 
the  money  borrowed  book  would  show  the  place  of  deposit. 
If  the  shares  had  been  loaned  out  in  the  Street,  then,  under 
the  date  of  lending,  the  stock  loan  would  be  recorded  in  a 
financial  manner  upon  the  ex-clearing  house  blotter,  and, 
for  memorandum  purposes,  in  the  stocks  loaned  section  of 
the  stocks  borrowed  and  loaned  book. 

In  following  the  hypothetical  transaction  through  the 
respective  books  which  are  affected  by  the  transaction,  the 
close  relationship  of  one  book  to  another  is  clearly  seen. 
The  records  might  be  different,  however,  if  for  instance,  the 
stock  was  not  a  clearing  house  listing,  or  if  a  different 
method  of  financing  the  transaction  became  necessary. 


CHAPTER    IX 

THE    CLEARING   HOUSE    SHEET 
The  Stock  Clearing  House 

The  discussion  centering  around  methods  of  financing 
or  settling  Wall  Street  transactions  would  not  be  complete 
without  a  word  as  to  the  Clearing  House  system  and  the 
service  which  it  renders  the  broker.  So  important  an  in- 
stitution is  it  that  the  daily  voluminous  Wall  Street  transac- 
tions would  be  practically  impossible  without  its  aid. 

As  the  Bank  Clearing  House  facilitates  the  adjustment 
and  payment  of  the  many  millions  of  dollars  of  debits  and 
credits  arising  during  a  given  day,  so  does  the  Clearing 
House  of  the  New  York  Stock  Exchange  assist  in  the  ad- 
justment and  delivery  of  the  many  hundreds  of  thousands 
of  shares  of  stock  purchased  and  sold  daily  among  its 
members. 

Because  of  this  enormous  volume  of  trading  in  certain 
securities,  the  Stock  Exchange  established  its  own  clearing 
house  in  1892.  To  illustrate  the  importance  of  its  work, 
turn  to  the  date  of  April  15,  1915,  when  over  318.000  shares 
of  stock  were  traded  in  four  issues  alone,  as  follows : 

63,500  shares  of  Amalgamated  Copper 
60,400  shares  of  Reading 
39,800  shares  of  Union  Pacific 
154,675  shares  of  Steel  common 

These  transactions  represented  values .  approximating 
$28,000,000,  to  say  nothing  of  the  transactions  in  the  other 
issues  on  that  same  day.  In  about  four  hours  on  the  fol- 
lowing day,  April  16,  all  settlements— deliveries  and  re- 
ceipts—were effected.  It  can  readily  be  seen  how  great  is 
the  work  of  the  Stock  Exchange  Clearing  House. 

^7 


68 


STOCK    BROKERAGE 


The  following  list  gives  the  securities  which  come  under 
the  jurisdiction  of  the  Clearing  House.  They  are  known 
as  clearing  house  listings.  Opposite  each  appears  the  abbre- 
viation used  to  indicate  that  security  on  the  ticker  tape. 

Clearing  House  Stocks 


' 


THE    CLEARING    HOUSE    SHEET 


69 


Amal.  Copper (C) 

Am.  Beet  Sug.  Com (ABS) 

Am.  Can   Com (CAN) 

Am.  Can  Pr (CAN  PR) 

Am.  Car  &  F.  Com (AF) 

Am.  Cotton  Oil (AO) 

Am.  Loco.    Com (ALO) 

Am.  Tel.  &  Tel.  Co (ATT) 

Anaconda  (ANC) 

Atchison  Com (A) 

Atchison  Pr (A  PR) 

Bait.  &  O.  Com (BO) 

Bait.  &  O.  Pr (BO  PR) 

Brooklyn  R.  T (B) 

Cal.  Pet.  Com (CPU) 

Can.    Pac (CA) 

Cent.  Lea.  Com (CL) 

Cent.  Lea.  Pr (CL  PR) 

Ches.  &  Ohio (CO) 

Chi.  &  N.  W.  Com (NW) 

Chino   Copper (CY) 

Col.  Fuel  Com (CF) 

Consol.  Gas (G) 

Corn  P.  Ref.  Com (CR) 

Corn  P.  Ref.  Pr (CR  PR) 

Del.  &  Hudson (DH) 

Denver  Com (D) 

Dist.  Sec (DR) 

Erie   Com (E) 

Erie  1st  Pr (EI  PR) 

Erie  2nd  Pr (EI  PR) 

Gen.    Electric (GE) 

Gr.  Northern  Pr (GNR  PR) 

Gr.  Nor.  Ore  Ctfs (ORE) 

Great  West (GW) 

Great  West.  Pr (GW  PR) 

Ice   Sec (IS) 

111.   Central (IL) 

Inter.  Met.  Com (IB) 

Inter.  Met.  Pr (IB  PR) 

Lehigh  Val (LV) 

Louis.  &  Nash (L) 

Manhattan   ( M ) 

Mex.   Pet. (MNP) 


M.  K.  &  T.   Com (K) 

M.  K.  &  T.  Pr (K  PR) 

Missouri  Pac (MP) 

Nat.  Lead (LT) 

Nevada  Con.  Cop (NV) 

N.  Y.  Central (CEN) 

N.  Y.,  New  H.  &  H (NH) 

Norf.  &  W.  Com (N) 

Norf.  &  W.  Pr (N  PR) 

Northern  Pac (NP) 

Ont.  &  West (OW) 

Pacific  Mail ( P) 

Pennsylvania (PA) 

People's   Gas (PO) 

Press.  Steel  Com (PRS) 

Ray  Consd.  Copper (RC) 

Reading    Com ( RG) 

Reading  1st  Pr (RG  I  PR) 

Reading  2nd  Pr (RG  II  PR) 

Rep.  Steel    Com (RBC) 

Rep.  Steel  Pr (RBC  PR) 

Rock  Isl.    Com (R) 

Rock  Isl.   Pr (R  PR) 

Rubber  Com (RU) 

Smelters   Com (AR) 

Southern  Pac (SP) 

South.  Ry.   Com (SR) 

South.  Ry.  Pr (SR  PR) 

St.  L.  &  S.  W.  Com (SS) 

St.  L.  &  S.  W.  Pr (SS  PR) 

St.  Paul  Com (ST) 

Sugar  Com (S) 

Tennessee  Cop (TC) 

Texas  Pac (T) 

Third    Ave (TAV) 

Union  Pac.  Com ( U) 

Union  Pac.  Pr (U  PR) 

U.  S.  Steel  Com (US) 

U.  S.  Steel  Pr (US  PR) 

Utah  Copper (UT) 

Virginia   (Them ( VC) 

West.  Un.  Tel (W) 

Westinghouse  (WX) 


The  Methods  of  the  Clearing  House 

Each  member  of  the  Exchange  is  entitled  to  clearing 
house  privileges.  Each  broker  who  avails  himself  of  this 
right,  receives  a  number  which  appears  on  his  "Clearing 
House  Ticket,'*  and  also  on  his  other  clearing  house  docu- 
ments. 

For  every  purchase  made  on  the  Exchange  there  must 
be  a  bona  fide  sale,  and  both  brokers — one  buying  for  his 
customer,  the  other  selling — must  intend  to  receive  and  de- 
liver the  shares  involved  in  the  transaction.  Every  time  a 
clearing  house  stock  is  dealt  in,  there  is  an  implied  agree- 
ment that  the  trade  is  to  be  handled  in  the  customary  way 
— namely,  through  the  Clearing  House. 

One  block  of  stock  might  represent  a  purchase  of  ten 
thousand  shares  bought  from  fifty  respective  brokers.  The 
price  of  the  stock  might  vary  from  one-eighth  of  a  point  to 
several  points,  depending  upon  the  condition  of  the  market 
at  the  time.  It  is  a  well-known  fact  that  such  huge  pur- 
chases are  consummated  by  a  nod  of  the  head  or  a  discordant 
"bought"  or  "sold."  In  order  to  obviate  any  possible  price 
differences  in  such  "offhand"  trading,  each  transaction  is 
"compared"  almost  immediately  after  the  close  of  the  daily 
business.  In  ex-clearing  house  transactions,  comparison 
may  be  made  also  before  the  opening  of  the  market  on  the 
succeeding  day. 

Clearing  house  transactions  are  compared  in  the  follow- 
ing manner:  Slips  called  "Clearing  House  Tickets"  are 
exchanged  between  buyer  and  seller,  these  tickets  evidencing 
the  quantity,  description,  and  value  of  the  shares  sold.  The 
seller's  ticket,  i.e.,  the  ticket  given  to  the  purchaser  by  the 
seller,  is  a  white  one,  the  buyer's  ticket,  yellow.  The  seller's 
ticket  has  a  perforated  bill  of  sale  attached  to  it,  upon  which 
the  transfer  tax  stamp  appears  in  cancelled  form. 

These  tickets  are  in  form  and  in  fact  orders  on  the  Qear- 


70 


STOCK    BROKERAGE 


THE    CLEARING    HOUSE    SHEET 


71 


L) 


ing  House  to  deliver,  in  the  case  of  the  seller,  or  to  receive 
in  the  case  of  the  buyer,  100  shares  or  multiples  of  100 
shares  of  a  specified  clearing  house  stock  at  the  sale  and 
purchase  price  shown  on  the  tickets,  the  value  of  the  shares 
being  carried  out  in  dollars  and  cents.  It  is  obvious  that 
where  buyer  and  seller  exchange  tickets,  the  quantity,  price, 
and  money  value  should  agree.  If  they  do  not,  the  matter 
is  either  adjusted  before  4:15  p.m.  on  the  same  day,  or  else 
the  shares  are  not  passed  through  the  Clearing  House  that 
night.  The  item  is  then  settled  out  of  the  Clearing  House 
or  it  may  be  treated  on  the  following  day's  sheet. 

The  Clearing  House  Sheet 

When  the  day's  transactions  have  been  completed,  the 
clearing  house  tickets  are  written  up  on  a  sheet  which  is 
known  as  the  ''Clearing  House  Sheet."  As  shown  in  Form 
13,  this  is  divided  into  two  parts :  to  the  left,  or  the  "Receive 
from"  side,  are  five  columns  in  which  are  entered  the  white 
tickets  held  by  the  concern  which  is  preparing  the  sheet.  In 
the  first  of  these  columns  appears  the  broker's  name ;  then, 
in  order,  the  number  of  shares ;  the  description  of  the  stock 
which  is  to  be  cleared ;  the  price  of  the  purchase  as  it  appears 
on  the  white  ticket ;  and  the  money  value  thereof. 

To  the  right  of  the  clearing  house  sheet— the  "Deliver 
To"  side — information  is  listed  from  the  yellow  tickets 
which  the  concern  holds  and  which  were  given  it  in  ex- 
change for  its  white  or  "deliver"  tickets.  In  other  words, 
the  sheet  when  sent  to  the  Clearing  House  by  a  broker,  fur- 
nishes information  to  the  authorities  concerning  his  pur- 
chases and  sales  of  the  day,  together  with  a  list  of  stocks 
borrowed  or  returned.  Hence,  in  the  column  reading  "De- 
liver to,"  the  broker  compiling  this  sheet  lists  officially  the 
orders  which  he  makes  upon  the  Clearing  House,  directing 
delivery  of  the  shares  involved.     The  other  four  columns 


i 


■        I' 


correspond  to  those  on  the  left  side,  having  the  headings 
"Shares,"  "Stock,"  "Price,"  and  "Amount." 

At  the  bottom  of  the  clearing  house  sheet  the  following 
directions  appear :  "Enter  on  this  sheet  only  those  transac- 
tions for  which  tickets  have  been  exchanged,"  and,  "The 
tickets  must  agree  or  both  parties  will  be  fined."  This 
means  an  agreement  as  to  the  quantity,  money  value,  and 
description. 

Balancing  the  Clearing  House  Sheet 

It  will  be  remembered  that  the  function  performed  by 
the  Clearing  House  is  to  facilitate  transactions  in  clearing 
house  stocks  between  its  members,  by  expediting  the  de- 
livery and  receipt  of  such  stocks  and  by  effecting  settlement 
when  so  doing.  In  case  receipt  and  delivery  of  the  same 
kinds  of  shares  appear  on  the  clearing  house  sheet,  the  trans- 
actions are  set  ofif  against  each  other  when  the  clearing 
house  sheet  is  balanced.  This  is  done  for  the  purpose  of 
determining  what  is  to  be  received  from,  and  delivered  to, 
the  brokers  whom  the  Clearing  House  may  designate,  the 
receipt  and  delivery  to  be  actually  made  upon  the  following 
day. 

Much  in  the  same  manner  as  a  debtor  or  creditor  bank 
pays  or  receives  a  bank  clearing  house  certificate  in  settle- 
ment of  its  voluminous  transactions,  the  broker  receives  or 
delivers,  through  his  clearing  house,  the  net  shares  pur- 
chased or  sold,  paying  or  receiving  cash  against  them  as  the 
circumstances  may  require. 

On  the  "Receive  from"  side  of  the  clearing  house  sheet 
shown  in  Form  13,  are  listed : 

100  shares  of  Amalgamated  Copper 

100  shares  of  Steel 

100  shares  of  American  Smelters 


•J2  STOCK    BROKERAGE 

On  the  "Deliver  to"  side  are  listed : 

200  shares  of  American  Smelters 
100  shares  of  Union  Pacific 

The  only  set-off  is  the  Smelters  stock  to  the  extent  of 
100  shares,  leaving  as  the  "Balance  to  Receive,"  100  Steel 
and  100  Copper.  The  "Balance  to  Deliver"  is  100  Smelters 
and  100  Union  Pacific. 

Clearing  House  Deliveries 

The  question  may  arise  as  to  hov^r  the  Union  Pacific  and 
Smelters  are  to  be  secured  by  the  broker   for  delivery. 
Probably  he  has  the  stock  in  his  vault  or  elsewhere;  or  if 
these  sales  represent  short  sales,  he  will  very  likely  borrow 
this  stock  the  next  morning  to  effect  delivery.      Wherever 
one  customer  is  long  of  stock  which  is  carried  in  the  broker's 
vault  or  in  bank  loans,  and  another  of  the  broker's  clients 
has  made  a  short  sale,  the  broker  is  at  liberty  to  use  the  long 
stock  for  the  purpose  of  making  delivery — in  other  words, 
he  need  not  borrow  that  which  is  already  available,  but  may 
hypothecate  the  securities  of  his  customers. 

Clearing  House  Delivery  Prices 

The  question  naturally  arises  when  looking  at  the  clear- 
ing house  sheet,  shown  in  Form  13,  as  to  the  prices  at  which 
the  Copper  and  Steel  are  to  be  received,  and  as  to  the  de- 
livery price  of  the  Smelters  and  Union  Pacific.  Let  it  be 
supposed  that  5,000  shares  of  Copper  had  been  purchased 
during  the  day  at  prices  ranging  from  16  3/4  to  78.  What 
price  would  then  govern  as  the  receiving  price — 76  3/4  or 
l^"^.  If  the  broker  elected  76  3/4  as  the  settlement  price, 
then  the  whole  5,000  shares  could  not  be  received  at  that 
price;  some  of  it  was  purchased  at  1%.  The  same  diffi- 
culty and  haggling  over  settlement  price  would  be  expe- 


THE    CLEARING    HOUSE    SHEET 


73 


nenced  by  each  broker  whose  name  appeared  on  the  sheet. 
To  prevent  this  difficulty,  the  Clearing  House  prints  a  set 
of  prices  on  the  stock  ticker  at  about  3  :30  p.m.  each  day. 
These  prices,  covering  all  clearing  house  issues,  are  known 
as  the  "Clearing  House  Delivery  Prices."  All  net  receipts 
or  net  deliveries,  as  evidenced  by  the  clearing  house  sheet, 
are  settled  at  these  prices.  All  fractions  are  eliminated 
from  the  delivery  prices,  the  price  approximating  the  closing 
bid  or  oflfer  on  each  clearing  house  item. 

Referring  again  to  Form  13,  the  net  deliveries  of  100 
American  Smelters  and  100  Union  Pacific  which  appear  on 
the  "Deliver  to"  side  are  carried^  over  to  the  "Receive  from" 
side  opposite  the  side-head  "Balance  to  Deliver" ;  while  the 
net  receipts  are  carried  over  to  the  "Deliver  to"  side  oppo- 
site the  side-head  "Balance  to  Receive."  When  this  is  done, 
the  total  number  of  shares  including  the  "carry-overs"  will 
be  500  on  either  side.  Furthermore,  if  the  stocks  are 
checked  as  to  description  and  quantity,  it  will  be  found  that 
they  check  by  set-offs. 

At  this  point  the  clearing  house  delivery  prices  are  ap- 
plied to  the  "Balance  to  Receive"  and  "Balance  to  Deliver" 
stocks.  On  the  date  given  in  Form  13,  price  for  Smelters 
was  70;  for  Union  Pacific,  162;  for  Steel,  67;  and  for 
Copper,  77.  Hence,  the  Steel  is  received  at  67  or  $6,700, 
and  the  Copper  at  77.  or  $7,700.  The  Smelters  is  delivered 
at  70  or  $7,000;  and  the  Union  Pacific  at  162  or  $16,200. 

The  next  step  is  to  foot  the  two  "Amounts"  columns. 
In  doing  this  it  will  be  found  that  the  credit  side  of  the  sheet 
totals  $44,650,  and  the  debit  side  $44,450— a  difference  of 
$200  in  favor  of  the  broker  whose  sheet  is  shown.  This 
excess  represents  the  amount  by  which  the  Clearing  House 
is  indebted  to  the  broker,  and  according  to  the  rules  he 
makes  a  draft  on  the  Clearing  House  for  this  sum,  the  Man- 
hattan Co.  being  the  drawee.    The  draft  will  be  bankable 


74 


STOCK    BROKERAGE 


if,  after  the  sheet  goes  through  (cleared),  the  manager  of 
the  Clearing  House  countersigns  the  instrument.  If  the 
sheet  showed  a  balance  against  the  broker,  then  a  check 
made  payable  to  the  Manhattan  Co.  must  be  sent  to  the 
Clearing  House  at  the  time  that  the  sheet  is  deposited. 

Receive  and  Deliver  Tickets 

Reverting  to  tlie  "Balance  to  Receive"  and  "Balance  to 
Deliver"  phases  of  the  clearing  house  sheet,  one  other  item 
is  necessary  before  the  sheet  is  ready  for  deposit  with  the 
Clearing  House.  To  complete  the  sheet,  there  are  attached 
to  it  clearing  house  tickets,  known  as  "Balance  to  Receive" 
and  "Balance  to  Deliver"  tickets.  The  balance  to  receive 
tickets  are  made  out  for  the  bulk  of  each  kind  of  stock  which 
is  to  be  received  on  net  balance,  and  the  balance  to  deliver 
tickets  are  made  out  for  the  bulk  of  each  kind  of  stock  which 
is  to  be  delivered  on  the  net  balance.  In  the  case  of  the  sheet 
shown  in  Form  13,  only  two  balance  to  receive  tickets  are 
necessary — one  for  100  shares  of  Copper,  and  the  other  for 
100  shares  of  Steel — while  two  balance  to  deliver  tickets 
are  necessary  to  evidence  the  broker's  net  delivery  obliga- 
tion—one for  100  Smelters  and  the  other  for  100  Union 
Pacific. 

On  the  receive  tickets  the  undersigned  respondent  broker 
advises  the  Clearing  House  that  he  "will  receive  the  follow- 
ing balance  of  stock  at  the  delivery  price" : 

100  Copper  at  17 
100  Steel  at  (i7 

On  the  deliver  tickets  the  broker  states  that  he  "will 
deliver  the  following  balance  of  stock  at  the  delivery  price" : 

100  Smelters  at  70 

100  Union  Pacific  at  162 

These  four  balance  tickets  are  called  for  at  the  Clearing 


THE    CLEARING    HOUSE    SHEET 


75 


i 


House  the  following  morning — Saturday  excepted — and  the 
face  of  the  receive  tickets  will  reveal  the  name  or  names  of 
the  brokers  whom  the  Clearing  House  has  designated  as  the 
delivering  brokers,  stating  the  number  of  shares  which  each 
one  is  to  deliver.  On  the  deliver  tickets  will  appear  the 
name  or  names  of  the  brokers  whom  the  Clearing  House  has 
designated  as  the  receiving  brokers.  Between  10  a.m.  and 
2:15  P.M.  all  these  balances  are  either  received  or  delivered, 
thus  settling  the  transactions.  The  smallest  quantity  of 
stock  which  is  received  or  delivered  through  the  Clearing 
House  is  100  shares;  no  broker  is  called  upon  to  settle 
fractional  lots. 

The  Broker's  Clearing  House  Balance 

Before  departing  from  the  subject  under  review — ^the 
clearing  house  sheet  and  the  balance  tickets — let  us  consider 
the  $200  which  was  received  from  the  Clearing  House. 
Does  this  represent  profit  to  the  broker?  The  answer,  in 
order  to  be  well  understood,  must  be  given  indirectly  by 
means  of  the  following  explanation :  Let  us  again  refer,  in 
Form  13,  to  the  purchase  prices  of  the  Copper,  Steel,  and 
Smelters  and  compare  them  with  the  delivery  prices  as  stated 
that  day.  The  Copper  was  bought  by  X  &  Co.  at  $7,675. 
By  reason  of  the  Clearing  House  price  being  stated  at  77, 
X  &  Co.  will  have  to  pay  $7,700  instead  of  $7,675,  as  would 
ordinarily  be  the  case.  The  broker  who  sold  this  stock  at 
$7,675  would  receive  $25  more  than  he  would  be  justly 
entitled  to.  But  he  would,  in  switching  his  net  delivery  of 
100  Copper  to  the  receive  side  of  his  sheet,  be  compelled  to 
use  77  as  his  clearing  house  price  also.  Deducting  the  lesser 
from  the  greater  side,  his  sheet  would  reflect  a  debit  to  the 
Clearing  House  of  $25 ;  while  X  &  Co.'s  would  show  a  draft 
for  this  amount,  provided  that  the  Copper  transaction  was 
the  only  item  cleared.     There  are,  however,  other  transac- 


76 


STOCK    BROKERAGE 


tions  shown  on  the  sheet.  The  Steel  purchase  at  $6,662.50 
is  handled  much  in  the  same  manner ;  but  here  $37.50  is  the 
amount  so  adjusted.  The  100  Smelters  bought  at  69  1/8 
for  $6,912.50  is  offset  on  the  opposite  side  by  100  Smelters 
sold  at  70  1/4  for  $7,025,  making  a  profit  of  $1 12.50.  It  is 
quite  obvious  that  X  &  Co.  have  a  right  to  draw  for  this 
amount,  for  the  reason  that  it  happens  to  be  the  only  way  to 
collect  the  profit.  Lastly,  another  100  shares  of  Smelters 
was  sold  at  70  1/4,  which  must  be  delivered  at  70.  In  that 
event  X  &  Co.  would  be  underpaid  by  the  receiving  broker, 
but  on  this  item  also,  the  seller  is  entitled  to  collect  from  the 
Clearing  House  the  difference  of  $25.  If  the  other  trans- 
actions are  followed  out  in  like  manner,  it  will  be  seen  that 
the  total  of  the  four  items  aggregates  $200 — the  draft  on  the 
Clearing  House. 

If  the  sheets  of  other  respondent  brokers  were  analyzed 
with  the  purpose  of  determining  the  amount  of  X  &  Co.*s 
collection,  it  is  safe  to  say  that  a  reconciliation  could  be  had 
very  easily.  In  fact,  the  machinery  of  the  Clearing  House 
does  just  this  analytical  work  to  prove  the  correctness  of  all 
items  appearing  on  the  sheets.  It  must  be  emphasized  again 
that  a  draft  on,  or  check  to,  the  Clearing  House  is  a  matter 
which  is  automatically  adjustable  and  does  not  change  by 
adding  to  or  deducting  from  the  real  purchase  cost  or  sale 
proceeds  of  transactions. 

The  two  sides  of  the  sheet  are  now  in  balance,  for  on  the 
lesser  side  the  draft  for  $200  equalizes  them.  In  preparing 
the  sheet  for  deposit,  the  shares  are  checked  up  and  footed. 
The  clearing  house  tickets,  balance  tickets,  and  the  draft  all 
accompany  the  sheet. 


CHAPTER    X 

BALANCING   THE   BLOTTERS 

Balancing  the  Clearing  House  Blotter 

The  clearing  house  blotter,  as  stated  in  Chapter  IV,  is 
one  of  the  two  records  from  which  purchases  and  sales  are 
posted  to  the  individual  customers'  accounts,  the  ex-clearing 
house  blotter  being  the  other.  The  clearing  house  blotter 
will  also  be  referred  to  in  its  relation  to  the  clearing  house 
sheet.  We  shall  now  consider  the  method  by  which  the 
clearing  house  blotter  is  balanced. 

In  reviewing  the  columnarization  of  the  record  (Form 
14),  we  find  that  the  first  five  columns  on  either  side  are 
practically  identical  with  the  first  five  columns  of  the  receive 
and  deliver  sides,  respectively,  of  the  clearing  house  sheet 
(Form  13).  That  is  to  say,  the  column  which  provides  for 
the  name  of  the  selling  broker,  under  the  caption  "Of 
Whom  Bought,"  corresponds  to  the  column  on  the  clearing 
house  sheet  which  is  headed  "Receive  from."  Thus  the 
name  of  the  broker  with  whom  tickets  have  been  exchanged 
against  purchases,  appears  again  in  this  blotter.  In  the 
same  way,  in  both  forms  the  columns  headed  "Number  of 
Shares"  or  "Shares,"  "Description"  or  "Stock,"  "Price," 
and  "Amount,"  correspond  and  are  self-explanatory. 

In  order  that  the  clearing  house  blotter  may  operate  as 
a  check  upon  the  sheet,  all  the  transactions— the  number  of 
shares,  nature  of  stock,  and  the  amount  involved,  as  evi- 
denced by  the  sheet— must  appear  again  upon  the  blotter. 
In  effect,  a  copy  of  the  sheet  is  preserved  in  blotter  form,  for 
in  every  detail  the  sheet  and  blotter  agree. 

The  methods  of  balancing  the  clearing  house  blotter  and 


1 


78 


STOCK    BROKERAGE 


the  clearing  house  sheet  are  so  much  alike  that  very  little 
need  be  added  to  the  discussion  of  the  balancing  of  the  clear- 
ing house  sheet,  in  Chapter  IX,  other  than  the  treatment  of 
the  information  found  in  the  blotter,  not  found  on  the  clear- 
ing house  sheet.  For  the  purpose,  we  will  take  the  trans- 
actions under  the  date  of  January  2,  discussing  them  in 
connection  with  the  clearing  house  blotter  of  January  3 
(Form  14). 

On  that  day  the  purchases  were: 

100  Copper,  at  76  3/4,  for  account  of  John  Jones 
100  Steel  common,  at  66  5/8,  for  Fred  Smith 
100  Smelters,  at  69  1/8,  for  Richard  Ross 

The  sales  were : 

200  Smelters,  at  70  1/4,  for  Richard  Ross 
100  Union  Pacific,  at  162,  for  Fred  Smith 

Reviewing  these  in  the  blotter,  we  find  that  the  first  five 
columns,  as  far  as  the  purchases  are  concerned,  express  the 
transactions  fully  up  to  the  point  of  cost  to  the  broker,  but 
the  commission  .on  the  purchases  increases  the  cost  to  the 
customers  by  $12,50  on  each  hundred  shares.  The  "Com- 
mission" column  reflects  this  additional  charge,  and  the 
"Total  Amount"  column  combines  the  "Amount"  and 
"Commission"  columns.  The  broker's  total  commission  on 
the  300  shares  purchased  during  the  day  is  $37.50. 

The  sales,  as  far  as  the  first  five  columns  are  concerned, 
bring  the  transaction  up  to  the  point  of  the  proceeds  received 
by  the  broker.  From  these  the  commission  and  tax  must 
be  deducted  in  order  to  arrive  at  the  proceeds  which  are  to 
be  credited  to  the  accounts  of  the  customers.  In  the  case  of 
the  Union  Pacific  the  net  proceeds  would  be,  $16,200  — 
$12.50  —  $2  =  $16,185.50.  In  the  same  way,  the  proceeds 
of  the   Smelters   sale   would  be,   $14,050  —  $25  —  $4  = 


BALANCING    THE    BLOTTERS 


79 


$14,021.  The  "Commission"  column  totals  $37.50,  and  the 
"Tax"  column  $6.  The  total  commission  earned  on  the 
600  shares  bought  and  sold  during  the  day  is  $75. 

The  first  step  in  balancing  the  clearing  house  blotter  is 
to  foot  the  individual  monetary  columns  of  the  receive  page, 
which,  if  cross-footed,  should  equal  the  footing  of  the  "Total 
Amount"  column  and  thus  prove  the  correctness  of  the 
work.  In  footing  the  deliver  page,  the  correctness  of  the 
work  can  be  established  by  adding  the  "Tax"  and  "Commis- 
sion" columns  to  the  footing  of  the  "Total  Amount" 
column,  which  should  then  equal  the  footing  of  the 
"Amount"  column. 

As  a  second  step,  the  total  commission  shown  on  the 
receive  page  is  carried  into  the  "Commission"  column  on  the 
deliver  page.  The  total  of  the  two  is  then  carried  to  the 
"Total  Amount"  column,  and  the  account  to  be  credited  with 
this  sum  is  that  of  Commission.  The  total  in  the  "Tax" 
column  is  treated  in  the  same  manner,  the  account  credited 
being  Revenue  Stamps  account. 

The  next  step  in  balancing  the  blotter  is  the  adjustment 
of  the  clearing  house  balances.  The  delivery  prices  are  used 
on  both  pages  as  shown  in  Form  14,  the  respective  amounts 
being  entered  in  the  "Amount"  column  and  the  grand  total 
of  these  amounts  being  carried  thence  to  the  "Total  Amount" 
column,  the  draft  for  $200  being  included.  Under  the  cap- 
tion "For  Whose  Account"  appears  "Clearing  House."  If 
all  "Balances  to  Receive"  and  "Balances  to  Deliver"  be  car- 
ried over  to  the  "Total  Amount"  column  as  shown  on  Form 
14,  and  if  all  the  columns  be  footed  properly,  then  the 
"Amount"  and  "Total  Amount"  columns  on  the  two  pages 
must  agree.  The  total  number  of  shares  must  also  agree  on 
both  pages  and  must  agree  with  the  footing  of  the  shares 
columns  on  the  clearing  house  sheet  as  well.  A  glance  at 
Form  14  will  show  that  such  is  the  case  with  the  transactions 


8o 


STOCK    BROKERAGE 


BALANCING    THE    BLOTTERS 


8i 


given.    The  close  relation  between  the  clearing  house  blot- 
ter and  the  clearing  house  sheet  is  also  clearly  seen. 

Before  leaving  the  subject,  it  should  be  noted  that  the 
cross  marks  (x)  appearing  against  the  clearing  house  items, 
indicate  that  these  are  not  to  be  posted  to  the  ledger.  The 
reason  for  this  is  quite  apparent,  if  we  but  remember  the  rule 
that  all  clearing  house  differences — whether  debit  or  credit 
— are  self-adjusting.  The  balances  appearing  on  the  clear- 
ing house  blotter  are  treated  finally  in  the  ex-clearing  house 
blotter  which  is  discussed  below. 

The  Ex-Clearing  House  Blotter 

One  more  record  must  be  considered  in  its  relation  to  the 
remaining  stocks  which  are  to  be  received  or  delivered — the 
ex-clearing  house  blotter  (Form  16).  All  receipts  of  stock 
are  evidenced  on  the  debit  side  of  this  blotter ;  all  deliveries, 
on  the  credit  side.  Hence,  when  the  broker  is  to  receive 
certain  shares  of  stock  through  the  Clearing  House,  he  may 
look  with  certainty  to  the  receive  page  of  the  ex-clearing 
house  blotter  to  find  the  facts  set  forth.  The  same  obtains 
in  the  matter  of  deliveries  of  clearing  house  balance  stocks. 

Referring  again  to  the  transactions  of  January  3,  on  the 
morning  of  January  5  the  cashier  enters  on  the  proper  page 
of  his  ex-blotter  (see  Form  16)  the  expected  receipt  of: 

100  Copper  at  17 
100  Steel  at  67 

He  will  also  make  entry  for  the  proposed  deliveries  of : 

100  American  Smelters  at  70 
100  Union  Pacific  at  162 

The  draft  of  $200  which  he  made  upon  the  Clearing 
House  will  have  been  collected  and  entered  as  a  credit  on  the 
"Deliver"  page.      The  customers  for  whom  stock  was  re- 


ceived against  purchases,  or  those  for  whom  delivery  was 
made  against  sales,  have  already  been  charged  with  such 
purchases  or  credited  with  such  sales  through  the  clearing 
house  blotter.  Then  the  item  in  the  ex-blotter,  which  attests 
to  the  receipts  or  delivery  of  clearing  house  balances,  is 
entered  as  "Clearing  House"  account.  No  posting  will  be 
necessary  to  evidence  the  receipt  or  disbursement  of  cash  for 
the  charge  or  credit  to  the  customer  in  the  clearing  house 
blotter,  presupposing  the  exchange  of  cash  in  the  trans- 
actions. 

Further  Uses  of  the  Ex-Clearing  House  Blotter 

Odd  lots  of  stock,  issues  which  are  not  listed  on  the 
Exchange,  bonds  of  every  description,  and  shares  which  do 
not  come  under  the  jurisdiction  of  the  Clearing  House,  are 
all  passed  through  the  ex-blotter.  When  comparisons  are 
made  of  purchases  or  sales,  the  delivery  rules  of  the  Ex- 
change stipulate  that  all  such  transactions  be  settled  upon  the 
next  delivery  day.  The  securities  are  received  and  paid  for, 
or  delivered  and  collected  upon.  The  customers'  accounts 
are  treated  through  this  record.  If  a  selling  broker  fails  to 
deliver  at  the  proper  time,  the  item  so  failed  upon  is  carried 
to  the  next  delivery  day,  and  the  customer's  account  is 
charged  when  the  stock  is  settled  and  paid  for. 

Balancing  the  Ex-Blotter 

After  the  close  of  business,  the  ex-blotter  in  use  that  day 
is  ready  for  balancing.  The  procedure  is  as  follows :  Foot 
the  "Total  Amount"  columns,  which  comprehend  cash  ex- 
changes of  each  page,  after  having  treated  the  commission 
and  tax  items  in  the  usual  manner.  These  two  items  appear 
on  the  credit  page.  Then  deduct  from  the  credit  footing  the 
debit  footing.  The  difference  will  represent  the  balance  of 
cash  in  the  banks  at  that  time.     A  reconciliation  is  made  by 


82 


STOCK    BROKERAGE 


proving  the  balance  with  the  check  books.  Carry  the  baliances 
to  the  "Receive"  page,  itemizing  the  respective  balances  in 
banks.  Each  bank  is  charged  with  the  balance  on  deposit 
and  credited  in  the  succeeding  day's  blotter  by  a  credit  to  it. 
Each  day  the  new  balance  is  debited  to  the  bank  account  in 
the  ledger.  In  this  way  a  chain  of  balances  exist  which  are 
always  reconcilable  with  the  check  book  and  which  can 
always  be  traced  to  the  preceding  day's  blotter.  That  is,  the 
ex-blotter  of  the  succeeding  day  will  contain,  as  a  first  item 
on  the  "Deliver"  page,  the  bank  balances  of  the  previous 
night.  As  a  last  consideration  in  balancing  the  blotter,  carry 
down  the  footings  of  the  two  "Total  Amount"  columns. 
These  must  be  in  agreement.  The  postings  of  the  "Amount" 
columns  need  not  necessarily  agree,  because  they  are  not  con- 
cerned with  cash  exchanges,  the  cash  being  received  and 
disbursed  in  the  "Total  Amount"  columns  (see  Form  16). 


r- 


*4t 


CHAPTER    XI 

TRANSACTIONS   OF   A   STOCK   BROKERAGE 
HOUSE— METHODS  OF  OPERATION 

In  order  that  the  principles  of  brokerage  accounting  may 
be  clearly  understood  we  will  now  give  a  series  of  trans- 
actions representative  of  the  average  brokerage  house, 
showing  entries  from  the  opening  to  the  closing  of  the 
books  of  account. 

Typical  Transactions 

Transactions  typical  of  the  business  and  occurring  almost 
daily,  may  be  summarized  as  follows :  purchases  and  sales ; 
borrowing;  lending;  returning;  calling;  renewal  (of  stocks 
borrowed  and  loaned). 

The  following  transactions  have  a  direct  bearing  upon 
purchases  and  sales,  from  the  point  of  either  financing  or 
delivery :  collateral  bank  loans ;  clearance  loans ;  money  loans 
(for  financing  transactions). 

Other  matters  to  be  considered  are  as  follows :  interest 
and  premiums  in  connection  with  money  borrowed  or  loaned 
and  stocks  borrowed  or  loaned,  which  reflect  costs  and  earn- 
ings pertaining  to  the  general  finances;  commission  and 
interest  on  customers'  transactions  which  are  additional  fac- 
tors affecting  earnings ;  "mark-ups"  and  "mark-downs,"  as 
they  affect  stock  loans;  dividends  credited  or  charged  to 
customers ;  the  interest  on  bond  purchases  or  sales ;  and  the 
custom  of  rendering  monthly  statements  to  clients  and  the 
computation  of  interest  on  such  accounts. 

83 


84  STOCK    BROKERAGE 

Inception  of  a  Brokerage  Partnership 

January  3,  1915,  D.  S.  Hand,  Carlyle  Bird,  and  C.  W. 
Boswell  form  a  partnership  under  the  firm  name  of  Hand, 
Boswell  &  Co.,  for  the  purpose  of  conducting  a  stock  broker- 
age business.  Boswell  contributes  capital  in  the  form  of  a 
stock  exchange  seat  valued  at  $50,000,  and  $50,000  in  cash. 
Bird  contributes  $100,000  in  cash.  Hand  contributes 
$200,000  in  securities,  having  an  accepted  value  of  $190,000, 
it  being  the  intention  of  the  parties  to  regard  the  latter 
amount  as  Hand's  contribution.  The  securities  so  given 
are  as  follows : 

$100,000,  Union  Pacific  1st  4%  bonds,  market  value $95,000 

50,000,  United  States  Steel  5%  bonds,  valued  at.  .........* .'.'      50,000 

50,000,  Southern  Pacific  refunding  4%  bonds,  valued  at 45^000 

Total  value  of  Hand's  contribution $190,000 

-All  profits  and  losses  are  to  be  distributed  equally  among 
the  partners.  Books  of  account  are  to  be  kept,  all  partners 
having  access  thereto.  The  depository  is  to  be  the  Man- 
hattan Co. 

Opening  Entries 

The  salient  factors  to  be  recorded  in  the  opening  entries 
relate  to  the  capital  contributions,  and  the  first  book  of  entry 
is  the  ex-clearing  house  blotter  (Form  15).  In  this,  under 
date  of  January  3,  the  following  entries  are  made : 

C  W.  Bosweirs  capital  account  is  credited  with  $100,000, 
made  up  of  $50,000  in  cash  and  $50,000  as  the  accepted 
value  of  the  stock  exchange  seat.  On  the  debit  side  of  the 
blotter,  Stock  Exchange  Seat  account  is  charged  with  a  like 
sum,  full  details  being  given  in  connection  therewith. 

D.  S.  Hand's  capital  account  is  credited  with  $190,000 
and  Securities  account  is  charged  with  a  like  sum,  the  de- 
scription of  the  securities  received  being  given  in  detail.    The 


TRANSACTIONS— METHODS   OF  OPERATION  g" 

values  as  expressed  on  the  debit  side  of  the  blotter  are  en- 
tered in  the  "Amount"  column,  in  which  are  brought  all 
transactions  involving  no  cash  exchange.  Boswell's  cash 
investment  of  $50,000,  together  with  any  other  cash  items, 
is  listed  in  the  "Total  Amount"  column  on  the  credit  or 
"Deliver"  page  of  the  ex-clearing  house  blotter.  The  $100,- 
000  cash  contributed  by  Bird  is  likewise  entered  in  this 
"Total  Amount"  column.  The  ex-blotter  at  this  point  is 
balanced  in  the  manner  prescribed  in  the  preceding  chapter, 
and  will  show  a  cash  balance  of  $150,000 — the  amount  for 
which  the  bank  account  is  charged.     (See  Form  15.) 

Customers*  Purchases  and  Sales 

On  Saturday,  January  3,  the  purchases  for  customers 
were  as  follows : 

500  Steel,  at  66,  for  account  of  J.  Jones 
100  Union  Pacific,  at  162,  Fred  Smith 
200  Penn.,  at  119,  R.  Ross 
100  Copper,  at  67,  A.  Jessup 

The  sales  of  the  day  were: 

2,000  Reading,  at  167,  account  of  A.  Haskins 
500  Smelters,  at  70,  B.  Brown 
800  Copper,  at  71,  John  Rich 
200  American  Beet  Sugar,  at  22,  J.  Jones 

The  odd-lot  purchases  were: 

10  American  Can  preferred,  at  91,  E.  A.  Clancy 
30  Copper,  at  70,  E.  P.  Delano 

The  odd-lot  sales  were : 

10  Union  Pacific,  at  164,  E.  Samuels 

25  Brooklyn  Rapid  Transit,  at  91,  A.  Baskin 

The  cash  receipts  for  the  day  were : 


86 


STOCK    BROKERAGE 


$2,500  from  J. 

Jones 

1,000 

(t 

F. 

Smith 

1,000 

u 

R. 

Ross 

4,000 

it 

John  Rich 

100 

ti 

E. 

A.  Clancy 

250 

it 

A. 

Baskin 

The  purchase  of  100  shares  o 
Jessup  will  be  taken  up  by  him. 
of  30  shares  of  Copper  will  be 
hvered  to  him.  E.  Samuels  will 
Pacific  against  his  sale.  All  the 
on  Monday,  January  5,  so  that 
made  for  receipt  and  delivery. 


f  Copper  for  the  account  of 
The  purchase  by  Delano 
paid  for  and  the  stock  de- 
deliver  10  shares  of  Union 
transactions  will  be  settled 
proper  provision  must  be 


Financing  the  Transactions 

It  is  now  necessary  to  figure  the  cost  of  the  day's  trans- 
actions for  the  purpose  of  determining  what  stocks,  if  any, 
must  be  loaned  out  or  what  securities  the  broker  is  able  to 
carry  on  the  strength  of  his  own  cash  condition.  It  should 
always  be  borne  in  mind  that  conservative  practice  requires 
a  comfortable  balance  to  be  retained  at  the  bank.  It  would 
obviously  be  contrary  to  good  business  practice  to  allow  the 
entire  amount  of  cash  on  hand  to  be  expended  for  the  pur- 
pose of  carrying  customers^  holdings.  The  value  of  all 
purchases  of  January  3  amounts  to  $70,810.  The  bank 
balance,  therefore,  can  easily  provide  this  sum,  so  that  it  will 
not  be  necessary  to  lend  stocks  for  the  purpose  of  raising 
additional  funds. 

Borrowing  Stocks  against  Short  Sales 

Let  us  now  consider  the  stock-borrowing  demands  in 
order  to  enable  the  delivery  against  short  sales.  The  pur- 
chases and  sales  book  reveals  a  shortage  of : 


TRANSACTIONS— METHODS   OF  OPERATION         gj 

2,000  Reading 

500  Smelters 

800  Copper 

200  American  Beet  Sugar 

As  these  issues  are  all  clearing  house  stocks  it  is  expe- 
dient to  borrow  the  shares  from  the  "loan  crowd"  which 
assembles  on  the  floor  of  the  Exchange  after  the  close  of 
daily  business.  Assuming,  then,  that  this  is  done,  and  that 
all  the  clearing  house  purchases  and  sales  have  been  written 
up  in  the  proper  blotters,  the  next  steps  will  be  the  prepara- 
tion of  the  clearing  house  sheet  and,  simultaneously,  the 
balancing  of  the  clearing  house  blotter.  Besides  this,  it  will 
be  necessary  to  note  the  borrowing  transactions  in  the  stocks 
borrowed  and  loaned  book,  giving  full  account  of  the  name 
of  the  lender  and  the  rate  of  interest  on  the  stocks  so  bor- 
rowed. The  securities  ledger  will  contain  a  record  of  the 
purchased  and  borrowed  securities,  giving  at  once  all  neces- 
sary information. 

On  Monday,  January  5,  this  being  the  day  upon  which 
the  transactions  of  the  3rd  are  settled,  the  receipts  from  the 
Clearing  House  will  be : 

500  Steel 

100  Union  Pacific 

200  Pennsylvania 

100  Copper 

Mr.  Jessup,  for  whom  100  shares  of  Copper  were  pur- 
chased, remits  $6,712.50,  against  which  is  delivered  a  Street 
certificate  for  100  shares  of  this  stock.  The  receipt  of  cash 
from  Jessup,  together  with  the  receipts  from  the  Clearing 
House  and  the  "odd-lot"  transactions,  are  to  be  found  in 
the  ex-clearing  house  blotter  of  January  5. 


88 


STOCK    BROKERAGE 


l9i 


I 


Odd-Lot  Transactions 

A  word  is  necessary  here  to  explain  the  manner  in  which 
short  sales  in  odd  lots  are  treated.  According  to  the  pur- 
chases and  sales  book  in  which  such  listings  are  recorded, 
the  broker  will  be  called  upon  to  deliver  25  shares  of 
Brooklyn  Rapid  Transit.  These  shares  are  not  available 
for  delivery,  owing  to  the  fact  that  A.  Baskin  sold  short  and 
the  stock  could  not  be  borrowed.  Hence,  unless  demand  is 
made,  the  seller  will  "fail"  thereon.  Usually  such  short 
sales  of  odd  lots  are  covered,  or  bought  in  within  a  day  or 
two,  so  that  the  failure  for  that  length  of  time  is  often 
tolerated  by  the  purchasing  broker. 

The  10  shares  of  Union  Pacific  sold  at  164  for  the  account 
of  E.  Samuels,  have  been  received,  thereby  allowing  their 
delivery.  The  30  shares  of  Copper  purchased  at  70  have 
been  transferred  to  the  name  of  E.  P.  Delano,  he  having 
paid  $2,103.75.  ^ 

Routine  Records 

The  stock  transfer  register  is  necessarily  called  into  use 
at  this  point,  to  evidence  the  deposit  of  stocks  with  the 
transfer  office.  The  customers'  and  other  accounts  found 
m  the  clearing  house  blotter  are  posted  to  the  ledger  or 
ledgers.  If  a  customers  ledger  be  operated,  then  only  the 
Stock  Borrowed,  Commission,  and  Revenue  Stamps  accounts 
will  be  posted  to  the  general  ledger.  If  only  one  ledger  is 
m  use,  then  all  the  transactions  are  posted  to  the  general 
ledger.  This  obviates,  of  course,  the  introduction  of  a 
private  ledger,  which  if  used,  would  contain  the  nominal 
accounts,  such  as  "Commission"  and  "Interest." 

The  Revenue  Stamps  account  is  credited  with  the  amount 
of  tax  stamps  consumed  in  the  process  of  stock  delivery. 
This  presupposes  an  expenditure  for  revenue  stamps  which, 
when  purchased,  are  charged  to  this  account.    The  revenue 


; 


TRANSACTIONS-METHODS   OF  OPERATION         gg 

Stamp  register  is  also  called  into  operation,  expressing  the 
transfer  of  stock  by  sale  of  the  securities  dealt  in  on  Jan- 
uary 3.  "^ 

^  The  vault  list  further  evidences  the  deposit  of  the  stocks 
m  the  vault,  the  securities  being  in  possession  of  Hand,  Bos- 
well  &  Co.  These  securities  are  being  carried  by  them  for 
account  of  their  clients. 

Customers  Margin  Book 

The  customers  margin  book  is  the  only  record  which  has 
not  been  treated  in  connection  with  the  transactions  of 
January  3.     Turning  to  the  margin  sheet  of  B.  Brown   it 
will  be  found  that  he  is  short  of  500  shares  of  Smelters  at 
70.      If,  for  purposes  of  illustration,  we  assume  that  the 
closing  price  of  Smelters  was  75  (this  being  the  last  price  of 
the  day),  then  the  account  will  reflect  a  market  debit  ap- 
proximating $2,500.     This  debit  is  arrived  at  in  the  follow- 
ing manner:    B.   Brown  will  at  one  time  or  another  be 
compelled  to  purchase  this  stock  against  his  shortage.      If 
75  was  the  price  at  which  he  could  have  covered   then  he 
would  have  lost  5  points  on  500  shares,  or  $2,500.      To 
this  paper  loss  must  be  added  the  amount  of  commission  and 
tax.      Very  obviously,  Brown  has  been  extended  a  credit 
upon  which  he  is  operating  in  the  market.     If  in  the  judg- 
ment  of  his  brokers  he  is  not  sufficiently  strong  to  carry  his 
commitments  further,  then  a  request  for  market  margin  will 
be  made.     This  market  margin  will  tend  to  adjust  the  dif- 
ference between  the  price  at  which  Brown  sold  and  the 
present  market  price. 

The  account  of  John   Rich  is  an   "original"   margin 
account  and  the  treatment  diflFers  somewhat  from  credit 
accounts      Rich  is  short  of  800  Copper  at  71 ,  against  which 
he  has  deposited  $4,000,  or  5  points  on  each  100  shares 
If  the  broker  has  reason  to  believe  that  the  margin  is  ade- 


"\ 


I 


90 


STOCK    BROKERAGE 


quate,  then  no  call  for  further  margin  is  made.  On  the  other 
hand,  let  it  be  assumed  that  Copper  had  risen  to  73.  Rich 
would  have  but  3  points  and  a  request  might  be  made  for 
$5,600  or  7  points  additional  on  each  100  shares.  Then  the 
account  of  Rich  will  be  well  margined,  for  a  margin  of  ten 
points  is  considered  ample. 

The  account  of  A.  Haskins  does  not  require  comment  as 
it  is  similar  to  the  account  of  B.  Brown. 

J.  Jones  is  long  of  500  Steel  and  short  of  200  American 
Beet  Sugar.  From  the  standpoint  of  margins,  the  one 
sheet  is  all  that  is  necessary  to  determine  his  standing  in  the 
market.  Assuming  that  the  price  of  neither  Steel  nor 
American  Beet  Sugar  has  changed,  the  net  interest  in  this 
case  is  300  shares  long.  Since  an  original  margin  deposit 
of  $2,500  has  been  made  on  this  account,  Jones  will  have  an 
equity  of  approximately  8  points,  or  $2,400,  to  margin  the 
300  shares. 

In  the  case  of  Fred  Smith  the  price  of  Union  Pacific  has 
advanced  3  points  so  that  the  account  has  a  margin  of  $1,300 
or  13  points  on  100  shares. 

As  Pennsylvania  stock  is  of  the  par  value  of  $50,  it  is 
commonly  referred  to  in  the  Street  as  *'half  stock."  A  pur- 
chase of  200  shares  at  119  would  therefore  amount  to 
$1 1,900.  For  marginal  purposes  200  shares  of  "half  stock" 
is  considered  as  100  shares  of  stock  whose  par  value  is  $100. 
Thus  R.  Ross*  account  would  have  a  margin  of  10  points, 
it  being  assumed  that  the  market  price  is  unchanged.  The 
margin  accounts  of  Clancy  and  Baskin  are  comparatively 
simple  and  require  no  comment. 

The  entry  of  the  foregoing  completes  the  record  of  trans- 
actions of  January  3.  The  work  involved  in  the  entries 
described  is  usually  distributed  over  the  various  departments 
in  the  office  so  that  it  is  completed  at  about  noon  of  each 
day. 


' 


I 


TRANSACTIONS-METHODS  OF  OPERATION         gj 
Call  Loans 

The  ex-clearing  house  blotter  of  January  5  reflects  a  suf- 
ficient surplus  of  cash  to  warrant  lending  a  part  of  it  on 
"call."  The  floor  member  of  the  firm  is  therefore  instructed 
to  lend,  say,  $50,000  at  the  prevailing  interest  rate.  The 
name  of  the  borrower  and  the  nature  of  the  securities  by 
which  the  loan  is  secured  are  now  entered  on  the  receive 
page  of  blotter,  and  the  amount  loaned  out  is  shown  in  the 
"Total  Amount"  column.  The  account  charged  is  "Money 
Loaned."  ^ 

These  demand  loans,  or  call  loans  as  they  are  sometimes 
designated,  are  never  made  for  a  less  amount  than  $5,000. 
The  interest  is  usually  paid  at  the  time  the  loan  is  liquidated, 
and  when  paid  is  charged  to  Interest  on  Money  Borrowed 
account  if  funds  had  been  borrowed,  or  credited  to  Interest 
on  Money  Loaned  if  funds  had  been  loaned. 

Final  Entries 

The  final  operation  in  the  day's  work  is  the  balancing 
of  the  blotter,  bringing  down  on  the  receive  page  the  balance 
of  cash  with  which  the  bank  is  at  once  charged.  It  is  evi- 
dent, therefore,  that  the  bank  accounts  appearing  in  the 
general  ledger,  together  with  any  petty  cash,  comprise  the 
usual  cash  account.  The  bank  balance  is  immediately  car- 
ried to  the  deliver  page  of  the  next  day^s  ex-blotter,  so  that 
the  amount  charged  to  the  bank  on  the  3rd  will  be  credited 
to  the  bank  account  on  the  5th,  and  the  new  bank  balance  of 
the  latter  day  is  charged  as  heretofore. 

The  bookkeeper  posts  all  entries  to  the  respective  ledger 
accounts  under  the  date  of  January  5.  The  purchases  and 
sales  of  January  3,  together  with  the  cash  transactions 
appearing  under  that  date,  are  now  fully  settled. 


I 


TRANSACTIONS-PURCHASES   AND   SALES 


93 


CHAPTER    XII 

TRANSACTIONS    OF    A    STOCK    BROKERAGE 
HOUSE^PURCHASES   AND   SALES 

The  Daily  Routine 

The  following  purchases  and  sales  were  made  by  Hand, 
Boswell  &  Co.,  January  5: 

Purchases : 

25  Brooklyn  Rapid  Transit,  at  88,  A.  Baskin 
500  Smelters,  at  66,  B.  Brown 
3,000  Copper,  at  68,  John  Rich 
500  Steel,  at  65  3/8,  J.  Jones 
200  American  Beet  Sugar,  at  19,  J.  Jones 
10,000  Reading,  at  165,  A  Raskins 
600  Penn.,  at  118  1/4,  R.  Ross 
5,000  Union  Pacific,  at  158,  B.  Dick 
600  Anaconda,  at  36,  I.  Eakan 

Sales : 

500  Distillers  Securities,  at  19,  C  Ridge 
400  Illinois  Central,  at  110,  R.  Ross 
700  New  Haven,  at  67,  B.  Brown 
200  Penn.,  at  117,  B.  Axel 
600  Rubber,  at  59,  A.  Jessup 

A  review  of  the  above  transactions  will  show  that  the 
25  shares  of  Brooklyn  Rapid  Transit  sold  January  3  by 
A.  Baskin  were  "covered"  or  bought  back.  Thus,  while 
the  broker  failed  to  deliver  this  stock  within  the  delivery 
time,  he  is  now  prepared  to  make  delivery.  When  he  re- 
ceives the  shares  he  will  send  them  to  the  broker  who  is 
awaiting  receipt. 

92 


Turning  now  to  the  100-share  transactions,  we  find 
that  B.  Brown  covered  his  shortage  of  500  Smelters.  By 
purchasing  200  American  Beet  Sugar,  J.  Jones  has  cov- 
ered his  shortage.  We  also  observe  that  John  Rich  pur- 
chased 3,000  shares  of  Copper,  covering  the  800  shares  of 
Copper  which  appeared  in  his  short  account  and  thereby 
reversing  his  position  in  the  market  to  the  extent  of  2,200 
shares  of  the  same  stock.  This  makes  Rich's  account, 
technically  speaking,  long.  The  same  holds  true  in  the 
case  of  A.  Haskins  who  purchased  10,000  Reading.  Being 
formerly  short  of  2,000  shares  he  has  reversed  his  position 
in  the  market,  going  long  8,000  shares.  In  the  cases  of 
both  Haskins  and  Rich,  new  ledger  accounts  showing  the 
present  longs  will  be  necessary.  Their  short  accounts  will 
be  charged  with  the  number  of  shares  representing  the 
shortage,  and  the  long  accounts  will  be  charged  with  the 
remainder. 

Borrowed  Stock 

On  January  3,  in  order  to  make  possible  the  delivery 
against  short  sales.  Hand,  Boswell  &  Co.  were  compelled 
to  borrow: 

2,000  Reading 
500  American  Smelters 
800  Amalgamated  Copper 
200  American  Beet  Sugar 

It  is  quite  apparent  that  when  the  brokers'  customers 
cover  their  shortages,  the  brokers  will,  upon  receipt  of  the 
shares  so  purchased,  be  in  a  position  to  return  this  bor- 
rowed stock.  Accordingly,  Hand,  Boswell  &  Co.  having 
no  further  use  for  the  stock,  inform  the  respective  lending 
parties  that  they  will  "return  on  the  sheet  of  today,"  the 
above-listed  borrowed  stock. 


94 


STOCK    BROKERAGE 


Stock  Returns 

At  this  point  a  digression  is  necessary  in  order  to 
explain  the  means  by  which  stock  returns  are  made  pos- 
sible. Stock  loans  in  general  are  both  "returnable"  and 
"callable,"  provided  reasonable  notice  is  given  to  the 
other  broker.  Loans  involving  clearing  house  issues  are 
settled  on  the  clearing  house  sheet.  Thus  a  return  of  a 
clearing  house  stock  necessitates  an  exchange  of  clearing 
■  house  tickets.  On  the  sheet  the  returns  are  treated  in 
the  same  manner  as  a  sale,  for  the  reason  that  an  order  is 
therein  given  to  the  Clearing  House  to  deliver  certain 
shares. 

Whenever  stocks  are  borrowed,  cash  is  paid;  and  con- 
versely, whenever  stocks  are  loaned,  cash  is  received.    As 
the  broker  loaning  the  stock  profits  from  the  use  of  the 
money  which  he  receives  against  such  loans,  he  should 
pay  interest  at  the  agreed  rate.    Taking  a  concrete  case, 
let    it   be   supposed   that    the    500   shares   of  American 
Smelters  mentioned  in  the  foregoing  transaction,  were 
borrowed  at  2  1/2%;  that  the  clearing  house  price  that 
day  for  Smelters  was  68  (the  clearing  house  prices  being 
those  which  govern  all  stock  loans  cleared  on  the  sheet), 
and  $34,000  the  amount  involved.    If  the  stock  were  bor- 
rowed on  the  sheet  of  January  3,  the  transaction  would 
go  through  on  the  5th.     If  returned  on  the  sheet  of  Jan- 
uary 5,  then  the  transaction  would  be  settled  January  6, 
and  one  day  would  measure  the  time  on  which  interest  at 
the  rate  of  2  1/2%  is  chargeable  on  $34,000;  the  interest 
in  this  case  being  $2.36.     The  amount  on  the  clearing 
house  ticket  and  hkewise  on  the  sheet  would  then  read 
$34,002.36. 

On  the  other  hand,  let  us  suppose  that  this  same  loan 
extended  over  a  period  of  20  days  and  that  the  rate  varied; 
the  range  being  from  2  to  4  1/2%.    In  that  case,  when 


TRANSACTIONS-PURCHASES   AND    SALES  95 

the  Stock  was  returned,  the  amount  of  interest  would  be 
arrived  at  in  this  manner  (provided,  of  course,  that  these 
are  the  rates  at  which  the  stock  was  lending  on  the  various 
days):  2  1/2%  for  4  days  +  2%  for  5  days  +  3%  for  8 
days  +  4  1/2%  for  the  balance  of  the  time.  The  interest 
on  the  above  transaction  would  amount  to  $59.03,  so  that 
the  clearing  house  ticket  would  read  $34,059.03. 

Short  Sales 

Returning  to  the  subject  proper,  we  find  by  consulting 
the  purchases  and  sales  book  that  it  will  be  necessary  to 
borrow: 

500  Distillers  Securities 
400  Illinois  Central 
700  New  Haven 

all  representing  short  sales.  Notice  is  served  on  the  floor 
broker,  or  the  clerk  in  charge,  to  do  the  necessary  borrow- 
ing. ■     , 

On  this  day  200  shares  of  Pennsylvania  were  sold  for 
the  account  of  B.  Axel,  but  the  sale  is  offset  by  the  pur- 
chase of  600  shares  of  the  same  security  for  R.  Ross.  If 
no  Pennsylvania  had  been  so  bought,  delivery  against  the 
short  sale  could  have  been  made  by  using  the  200  shares 
of  Pennsylvania  which  were  deposited  in  the  vault  on 
the  3rd. 

Cash  Items 

On  the  sale  of  600  shares  of  Rubber  by  Jessup,  de- 
livery was  promised  by  the  customer,  making  this  transac- 
tion one  which*  is  commonly  referred  to  as  a  "cash  item." 
This  term,  as  used  here,  means  in  the  case  of  a  purchase 
that  the  customer  will  buy  the  stock  outright,  and  that 
in  the  case  of  a  sale  he  will  actually  deliver  the  shares  to 
the  broker. 


96 


STOCK    BROKERAGE 


Financing  the  Purchases 

The  next  step  is  a  consideration  of  the  cash  necessary 
to  finance  the  customers'  purchases.    It  would  be  almost 
impossible,  in  a  work  of  this  nature,  to  trace  the  daily 
margin  deposits  of  customers  in  connection  with  their 
cash  condition.    It  is  sufficient  to  restate  the  general  rule 
that  on  speculative  transactions,  credit  customers  are  not 
called  upon  for  original  margins,  but  other  clients  are  re- 
quired to  make  adequate  marginal  deposits.     In  the  set 
of  hypothetical  transactions  of  Hand,  Boswell  &  Co.,  it  is 
always  to  be  inferred  that  a  proper  margin  system  is  in 
operation  and  that  all  the  usual  margins  have  been  re- 
ceived.    If,  as  in  the  transactions  of  the  5th,  the  total  of 
all  purchases  amounts  to  approximately  $1,500,000,  and 
the  cash  condition  of  the  firm  makes  it  necessary  to  lend 
stocks  to  strengthen  the  finances,  then  the  order  will  be 
given  to  lend  a  sufficient  quantity  of  securities  to  secure 
the  required  cash.      In  regard  to  the  money  loaned  out  on 
call,  the  custom  is  that  all  such  loans  can  be  called  before 
1  P.M.  on  the  day  of  demand.     Needless  to  say,  the  money 
which  was  loaned  out  on  demand  will  have  been  called  the 
night  previous,  and  be  paid  to  Hand,  Boswell  &  Co.  the 
day  after  call.     The  element  of  interest  in  this  case  has 
already  been  touched  upon. 

For  immediate  needs  in  the  case  in  question,  it  is  found 
necessary  to  lend: 

2,200  Copper 
800  Reading 
5,000  Union  Pacific 


All  the  stock  loans  will  be  passed  on  the  clearing  house 
sheet  and  in  that  way  offset  a  certain  amount  of  pur- 
chase, making  the  cash  needs  less  urgent. 


TRANSACTIONS— PURCHASES   AND   SALES 


97 


The  following  stocks  can  be  received  and  paid  for  out 
of  the  cash  balance  remaining  in  the  bank: 

500  Steel 

400  Pennsylvania 

600  Anaconda 

Premium  and  Interest  on  Stock  Loans 

In  order  to  bring  out  the  principle  of  premiums  and 
interest  on  stock  loans,  let  it  be  supposed  that  the  2,200 
shares  of  Copper  were  loaned  at  1/64  premium,  which 
means  that  not  only  is  no  interest  paid  on  the  money  re- 
ceived on  the  security  of  this  stock,  but  that  the  borrow- 
ers of  the  stock  actually  pay  the  lenders  a  premium  of 
1/64  of  1%  on  the  face  value  of  the  stock.  Let  us  further 
suppose  that  the  Reading  was  loaned  ''flat,"  which  means 
that  the  stock  is  in  great  demand  and  therefore  no  interest 
is  charged  thereon,  and  that  the  Union  Pacific  was  loaned 
at  2%  interest. 

Recording  the  Day's  Transactions 

The  transactions  of  the  day  are  now  all  passed  through 
the  customary  books,  the  clearing  house  blotter  being 
balanced  in  conjunction  with  the  sheet.  In  this  particular 
instance,  the  Stocks  Borrowed  account  would  appear  on 
the  credit  page  of  the  clearing  house  blotter  to  evidence 
the  return  of  stock  borrowed  the  night  previous.  The 
item  of  interest  on  the  stocks  returned  would  be  entered 
in  the  "Interest"  column;  and  in  carrying  the  total  of 
interest  to  the  "Total  Amount"  column,  the  Interest  on 
Stocks  Borrowed  account  would  appear  under  the  appro- 
priate heading.  The  Commission  account  will  be  credited 
with  the  commission  earned,  and  Revenue  Stamps  account 
with  the  revenue  stamps  consumed  by  reason  of  the  sales. 


98 


STOCK    BROKERAGE 


The  stocks  borrowed  and  loan  book  will  evidence  the 
return  of  the  borrowed  stocks,  and  the  loaned  section  of 
the  same  record  will  state  in  detail  the  facts  concerning 
the  lending  of  securities. 

The  stock  ledger,  vault  list,  and  customers  margin 
book,  together  with  the  revenue  stamp  register,  will  ex- 
press the  changes  in  the  condition  of  securities,  the 
changes  in  customers*  accounts,  and  the  consumption  of 
revenue  stamps. 

The  ex-clearing  house  blotter  will,  in  the  case  of  the 
25  shares  of  Brooklyn  Rapid  Transit,  show  the  delivery 
of  that  stock.  It  will  also  record  all  subsequent  trans- 
actions, such  as  the  receipt  of  margin  from  customers,  the 
calhng  in  of  the  money  loaned,  and  the  interest  thereon. 
In  this  case  the  interest  account  to  be  credited  is  that  of 
"Interest  on  Money  Loaned."  This  blotter  is  now  bal- 
anced in  the  usual  way  and  sent  to  the  bookkeeping  de-  ' 
partment  for  posting. 

The  Day's  Transactions 

Purchases  on  January  6  were: 

500  Distillers  Securities,  at  21,  C.  Ridge 
800  Illinois  Central,  at  112  1/8,  R.  Ross 
700  New  Haven,  at  68  3/8,  B.  Brown 

The  sales  in  the  same  day  were: 

2,200  Copper,  at  70,  J.  Rich 

8,000  Reading,  at  167  3/8,  A.  Haskins 

5,000  Union  Pacific,  at  160  5/8,  B.  Dick 

On  the  previous  day,  stocks  borrowed  against  shorts 
were: 

500  Distillers  Securities 
400  Illinois  Central 
700  New.  Haven 


TRANSACTIONS-PURCHASES   AND   SALES 


99 


A  return  of  all  these  borrowed  items  is   made  possible 
this  day  by  the  covering  thereof. 

The  brokers,  in  order  to  raise  funds  on  the  previous 
day,  faced  the  necessity  of  lending: 

2,200  Copper 
8,000  Reading 
5,000  Union  Pacific 

The  Call  and  Return  of  Stocks  Loaned 

Subsequently,  the  brokers  are  called  upon  to  deliver 
like  quantities  of  these  same  shares  by  reason  of  the  day's 
sales.  Then,  in  order  to  make  a  delivery,  they  will  call 
the  stocks  which  were  loaned  (these  being  cleared  on  the 
sheet);  that  is  to  say,  they  will  request  the  return  of  the 
2,200  Copper,  8,000  Reading,  and  5,000  Union  Pacific. 

As  these  are  clearing  house  listings,  there  is  the  usual 
inference  that  they  are  to  be  passed  through  the  Clearing 
House.  In  that  event,  the  sales  of  the  day  would  be  op- 
posed on  the  receive  side  of  the  sheet  by  stocks  similar  in 
quantity  and  nature,  which  are  being  returned  to  the 
house  by  various  other  brokers. 

On  both  the  call  and  return  of  stocks,  interest  is  com- 
puted for  the  length  of  time  that  the  money  has  been 
used.  In  the  case  of  the  called  stocks,  three  distinct  con- 
ditions may  exist — the  stocks  may  have  been  loaned  at  a 
premium,  a  flat  rate,  or  at  interest.  Turning  to  the  loaned 
section  of  the  stocks  borrowed  and  loan  book  we  learn 
that  the  Copper  was  loaned  at  a  premium  of  1/64,  i.e., 
1/64  of  1%  on  the  face  value  of  shares,  or,  as  the  rate  per 
day  per  hundred  shares,  $1.56,  always  excluding  Saturdays 
and  Sundays.  Therefore,  the  premium  on  the  2,200  shares 
of  Copper  for  one  day  would  be  $34.32.  The  broker  who 
is  returning  the  money  will  deduct  $34.32  from  the  prin- 


lOO 


STOCK    BROKERAGE 


cipal  of  the  loan.  In  other  words,  the  Copper  shares 
having  been  loaned  at  70,  his  clearing  house  ticket  would 
read:  2,200  Amalgamated  Copper,  $153,965.68. 

The  premium  on  these  2,200  shares  of  Copper  repre- 
sents an  earning,  and  in  order  to  effect  a  credit  to  the 
Premiums  account,  the  sum  must  be  carried  to  the  credit 
side  of  the  clearing  house  blotter  under  the  appropriate 
heading.  The  Stocks  Loaned  account  which  is  charged 
in  this  case,  will  apparently  contain  a  discrepancy  to  the 
extent  of  $34.32.  This  point  may  perhaps  be  more  clearly 
expressed  by  saying  that  the  "Amount"  column  on  the 
receive  page  of  the  clearing  house  blotter,  will  contain  a 
charge  of  $153,965.68.  If  to  this  sum  is  added  $34.32  and 
the  total  thereof  carried  into  the  "Total  Amount"  column, 
then  the  Stocks  Loaned  account  will  be  properly  charged 
with  $154,000,  representing  the  loan  value  of  2,200  shares 
of  Copper. 

In  the  case  of  the  Reading,  the  stock  was  loaned  flat; 
hence  it  will  be  returned  without  the  introduction  of  the 
usual  interest  factor.  The  stock  was  loaned  for  $660,000 
and  is  returned  against  the  same  amount  of  money. 

The  Union  Pacific  stock  was  loaned  on  January  5  and 
called  on  January  6.  One  day  is  the  elapsed  time  on  which 
interest  at  the  rate  of  2%  is  charged.  The  principal  being 
$790,000,  the  interest  thereon  would  be  $43.89.  This 
interest  is  charged  to  Interest  on  Stocks  Loaned  account. 

Interest  on  Stocks  Loaned 

If  stocks  which  have  been  borrowed  or  loaned  are 
neither  returned  nor  called  for  a  considerable  period,  then 
the  interest  rate  might  vary  from  day  to  day,  depending 
upon  the  prevailing  loaning  rates  of  stocks.  It  is  to  the 
advantage  of  the  lender  to  reduce  the  interest  rate  wher- 
ever possible.     The  converse  is  true  in  the  case  of  the 


TRANSACTIONS— PURCHASES   AND   SALES 


lOI 


borrower.  In  the  one  instance  a  lower  rate  means  a 
smaller  payment  for  the  use  of  money  obtained  on  the 
stocks  loaned,  while  the  borrower  of  the  stocks  will  earn 
more  if  he  renews  the  loan  at  a  higher  rate  of  interest. 

On  some  days  call  money  is  higher;  on  other  day§ 
lower.  Unless  there  be  a  short  interest  in  the  market 
(which  in  turn  means  a  great  demand  for  stock  borrow- 
ing), the  rate  at  which  stocks  will  loan  will  be  governed 
largely  by  call  money  conditions.  If  the  original  loaning 
rate  on  Steel  was  4%,  and  it  falls  to  3  1/4%,  then  in 
order  for  the  lender  of  stocks  to  reap  the  benefit,  he  must 
notify  the  borrower  that  the  rate  on  his  Steel  is  renewed 
at  3  1/4%.  If,  on  the  other  hand,  the  loaning  rate  of  Steel 
rises  to  5%,  then  it  is  necessary  for  the  borrower  to  serve 
notice  on  the  lender  that  the  renewal  rate  has  increased 
to  5%.  Unless  such  notice  is  given  by  the  borrower  or 
the  lender,  neither  has  the  right  to  change  the  rate  from 
that  which  prevailed  on  the  last  renewal  day.  These  mat- 
ters of  renewing,  etc.,  are  attended  to  each  day  after 

3  P.M. 

It  should  be  stated  here  that  the  borrowing  and  lend- 
ing of  securities,  and  therefore  the  rate  of  interest,  have 
absolutely  no  bearing  on  the  customers'  accounts  other 
than  that  they  control  the  interest  with  which  customers 
are  charged  at  the  end  of  each  month. 

Collateral  Bank  Loans 

Frequently  there  exists  no  borrowing  demand  for 
securities.  More  often,  inactive  issues  are  in  no  demand 
whatever.  Under  such  circumstances,  money  cannot  be 
had  on  the  usual  stock  loan.  Bonds  are  very  rarely  sold 
short,  and  seldom,  if  ever,  figure  prominently  in  the  activi- 
ties of  the  loan  crowd.  How  then  are  the  purchases  of 
inactive  issues  and  bonds  to  be  financed?    Relief  is  to  be 


I02 


STOCK    BROKERAGE 


found  in  the  collateral  bank  loan.    The  banker  or  broker 
who  lends  on  collateral  security  generally  desires  a  high 
grade  of  collateral,  i.e.,  securities  having  a  ready  and  avail- 
able market.     Industrial   stocks   usually  will  lend  at   a 
slightly  higher  rate  than  will  railroad  stocks  or  first-class 
bonds.     Sometimes  a  mixture  of  the  two  is  acceptable, 
while  at  other  times  the  money  lender  will  refuse  the  loan 
unless  a  better  kind  of  security  be  given.    Some  industrial 
stocks  will  loan  at  60%  of  the  market  value,  while  rail- 
road stocks  and  bonds  will  command  80%.     If  a  pur- 
chase of  a  poor  class  of  security  be  made,  the  marginal 
requirements  should  be  gauged  by  the  amount  of  money 
which   that   particular  security  could   realize  if  it  were 
pledged  in  a  collateral  loan. 

It  is  to  be  observed  that  most  collateral  demand  loans 
are  of  short  duration,  most  of  them  running  under  30  days. 
The  call  money  rate  on  these  loans  varies.  Here  again, 
the  lender  is  charged  with  the  duty  of  notifying  the  bor- 
rower when  he  wishes  to  increase  the  rate.  Likewise,  the 
borrower,  when  the  rate  decreases,  must  notify  the  bank 
and  arrange  with  it  for  the  lower  rates. 

Time  Loans 

Collateral  loans  are  made  also  on  time,  the  usual  period 
being  30,  60,  or  90  days.  Time  loans  are  made  at  a  stated 
and  permanent  rate  of  interest.  The  interest  is  generally 
settled  at  the  time  of  payment,  but  in  some  cases  the 
lender  will  request  the  payment  of  such  accrued  interest 
at  the  end  of  each  month.  The  point  in  connection  with 
accruals  from  the  borrower's  standpoint,  will  again  be 
treated  under  the  income  statement  (Chapter  XIV). 

Coupons 

When  coupon-bearing  bonds  are  deposited  as  collateral 


TRANSACTIONS— PURCHASES   AND   SALES 


103 


» 


security,  maturity  coupons  belong  to  the  owner  of  the 
bonds;  and  whenever  a  coupon  day  arrives,  the  borrower 
should  request  the  bank  to  cut  the  matured  coupons  from  the 
bonds  and  deliver  them  to  him  or  collect  them  for  his 
account,  as  he  may  desire. 

Equity  in  Collateral  Loans 

In  a  rising  market  the  equity  which  the  borrowing 
broker  has  in  his  securities  is  increased,  and  sometimes  to 
such  an  extent  that  he  may  withdraw  some  of  the  col- 
lateral. In  a  declining  market  the  equity  is  decreased  and 
the  broker  is  very  often  called  upon  to  deposit  additional 
security. 

Clearance  Loans 

Brokers  in  general  have  excellent  banking  connections. 
The  relation  between  banker  and  broker  is  so  close  that 
usually  the  former  is  kept  well  apprised  of  the  latter's  busi- 
ness conditions  and  stability.  Where  this  is  the  case,  the 
"clearance  loan"  is  a  common  method  of  meeting  the 
broker's  financial  needs.* 

On  some  days  the  receipts  of  securities  assume  large 
proportions.  The  broker  knows  before  10  o'clock  each 
morning  the  amount  he  will  need  to  carry  him  through 
the  day.  His  balance  is  seldom  large  enough  in  itself  to 
cope  with  a  day  of  extremely  large  business.  To  meet 
such  a  condition  he  will  perhaps  give  his  bank  a  note  for 
a  sum  large  enough,  in  connection  with  his  own  balance, 
to  pay  for  all  securities  to  be  received  by  him,  that  day. 
He,  then,  during  the  day  arranges  for  a  demand  or  a  time 
loan  to  provide  more  permanently  for  the  securities  paid 
for  through  the  medium  of  the  "clearance  loan."    At  the 

*For  an  interesting  discussion  of  the  clearance  loan,  and  the  Hockine  Coal 
12    1913°   *^^"^'°"  affecting  these   loans,  see   the  New  York  Mail  for   November 


I 


104 


STOCK    BROKERAGE 


end  of  the  day  he  deposits  a  sufficient  amount  of  money 
to  liquidate  the  clearance  loan,  and  the  transaction  is 
complete.  At  least  50%  of  all  stock  purchases  by  brokers 
are  financed  by  means  of  these  temporary  clearance  loans. 

The  Mark-Up  and  Mark-Down 

The  "mark-up"  (market  up)  as  explained  briefly  in 
Chapter  VI,  is  a  notice  of  an  increase  in  the  price  of  stocks 
issued  by  the  lender  of  these  stocks  to  the  borrower.  If 
the  market  rises  very  rapidly,  such  adjustments  will  be 
frequent.  In  fact  a  given  stock,  in  a  widely  fluctuating 
market,  might  be  adjusted  to  market  value  several  times 
during  a  day. 

The  mark-up  operates  in  favor  of  the  lender  because 
it  gives  him  a  greater  amount  of  money  on  his  stock.  On 
the  other  hand,  it  works  against  him  from  the  standpoint 
of  interest,  for  the  larger  the  principal  borrowed,  the 
greater  the  amount  of  interest  to  be  paid  thereon. 

The  "mark-down"  (market  down)  is  a  notice  of  a  fall 
in  the  price  of  stocks  given  by  the  borrower  of  such  stocks 
to  the  lender.  The  mark-down  is  a  feature  of  a  declining 
market  and  operates  in  favor  of  the  borrower  by  reason  of 
his  receiving  back  part  of  the  principal  which  he  has 
given  in  exchange  for  the  borrowed  stocks.  But  the 
mark-down  also  operates  against  him  from  the  standpoint 
of  interest,  for  the  reason  that  while  the  principal  is  being 
continuously  decreased  by  the  mark-downs  issued  by  him, 
the  interest  received  is  also  being  decreased  in  like  pro- 
portion. 

Both  mark-ups  and  mark-downs  are  issued  between 
10  A.M.  and  3  p.m.  From  the  standpoint  of  the  blotter, 
they  are  handled  in  the  following  manner: 

In  the  case  of  the  mark-up,  the  broker  who  is  lending 
the  securities  will  charge  "Stocks  Loaned"  (regardless  of 


\ 


TRANSACTIONS— PURCHASES   AND   SALES 


105 


the  nature  of  the  stock)  with  the  amount  of  the  old  prin- 
cipal, making  due  allowance  for  interest  charges,  and  will 
credit  Stocks  Loaned  with  the  new  principal  which  repre- 
sents the  increased  market  value. 

The  mark-down  is  treated  in  practically  the  same  way. 
But  here,  the  broker  issuing  it  is  borrowing  securities." 
The  Stocks  Borrowed  account  will  therefore  be  credited 
with  the  old  principal,  making  due  allowance  for  all  in- 
terest charges,  while  the  same  account  is  charged  with  an 
amount  representing  the  new  market  value  of  the  issues. 

In  the  case  of  a  mark-up,  the  borrowing  broker  gives 
the  lender  a  check  for  the  difference  between  the  old  prin- 
cipal less  the  interest  to  which  the  former  is  entitled,  and 
the  new  market  value  of  the  stock.  This  interest,  on  the 
books  of  the  broker  "marking  up"  is  charged  to  the  ac- 
count of  "Interest  on  Stocks  Loaned."  The  same  inter- 
est, from  the  standpoint  of  the  borrowing  broker,  repre- 
sents an  earning,  and  is  credited  to  Interest  on  Stocks 
Borrowed  account. 

All  changes  due  to  a  mark-up  or  a  mark-down  must 
be  reflected  in  the  corresponding  sections  of  the  stocks 
borrowed  and  loaned  book.  Either  has  the  effect  of  a 
new  transaction  and  is  treated  as  such. 

Interest  on  Bonds  Purchased  or  Sold 

Bonds  are  traded  in  on  the  Exchange — "and  Interest" — 
the  purchasing  broker  paying  interest  on  the  principal  from 
the  last  coupon  date.  To  illustrate,  let  it  be  assumed  that 
a  $1,000,  5%  bond,  with  interest  payable  January  1  and 
July  1  of  each  year,  is  purchased  July  31  at  99  7/8.  The 
amount  which  the  broker  will  pay  on  this  purchase  is 
$998.75  plus  the  interest  at  the  rate  of  5%  for  30  days 
on  the  principal  of  $1,000.  The  broker's  customer  is 
charged  with  the  total  of  these  two  amounts  plus  the  com- 


I 

J 


io6 


STOCK    BROKERAGE 


/ 


/ 


mission  of  $1.25  on  each  $1,000  bond.  The  same  method 
of  calculation  is  used  in  the  case  of  a  sale,  but  here  the 
customer  receives  the  total  of  the  first  two  amounts  less 
his  broker's  commission.  There  is  no  charge  for  revenue 
stamps  on  bond  sales. 

Dividends  on  Stocks 

Only  stockholders  of  record  are  entitled  to  dividends. 
That  is,  only  such  stockholders  as  have  had  their  stock 
registered  in  their  own  names  will  receive  payment  of 
dividends  direct  from  the  corporation  which  issues  the 
stock.  To  meet  this  condition,  it  is  customary  for  the 
broker  to  transfer  into  his  own  name  all  stocks  carried  by 
him.  For  instance,  a  broker  holding  500  shares  of  Steel 
common  for  various  speculative  accounts,  would  cause  a 
transfer  to  be  made  which  would  make  him  the  registered 
holder  of  500  shares  of  common  stock  on  the  transfer  and 
stock  books  of  the  United  States  Steel  Corporation.  The 
shares  in  this  form  are  considered  a  good  delivery.  By 
good  delivery  is  meant  that  certificates  bearing  a  "stock 
exchange"  indorsement  are  more  readily  acceptable  in  the 
Street  than  are  non-stock  exchange  indorsements. 

Whenever  a  stock  is  about  to  sell  ex-dividend,  notice 
thereof  is  printed  on  the  ticker.  All  transactions  thence- 
forth are  made  with  the  dividend  off.  The  price  of  such  a 
stock  frequently  reflects  a  decrease  to  the  extent  of  the 
dividend.  For  example,  if  Steel  were  marked  ex-dividend, 
John  Jones  could  then  buy  100  shares  at  55  instead  of 
56  1/4,  but  he  would  not  be  given  credit  for  the  dividend 
when  it  was  subsequently  paid. 

Customers  carrying  "long"  stock  before  declaration 
of  dividends,  and  who  do  not  dispose  of  their  holdings  be- 
fore the  time  that  the  stock  sells  ex-dividend,  receive 
credit  for  the  dividend  on  the  day  that  it  becomes  payable. 


TRANSACTIONS-PURCHASES   AND   SALES  107 

Thus,  if  a  customer  is  long  of  500  shares  of  Steel  on  which 
the  quarterly  dividend  of  1  1/4%  is  declared  and  payable, 
his  account  is  credited  with  $625,  representing  the  quar- 
terly dividend  of  1  1/4%,  or  $1.25  per  share.  The  cashier's 
department  keeps  a  dividend  memorandum  book  containing 
the  names  of  customers  entitled  to  dividend  credit. 

The  effect  which  a  dividend  declaration  has  on  stocks 
—if  sold  ex-dividend— is  a  depression  in  price.  Any  cus- 
tomer who  is  short  at  the  time  a  stock  sells  ex-dividend, 
is  charged  with  an  amount  representing  the  dividend. 
That  this  is  equitable  is  quite  apparent,  for,  unless  the 
charge  be  made,  the  customer  could  cover  his  shorts  at 
the  decreased  price,  thereby  gaining  in  the  operation.  The 
converse  of  this  gives  the  reason  for  crediting  dividends 
to  ''long"  customers.  If  the  latter  dispose  of  their  hold- 
ings while  the  dividend  is  off,  they  will  lose  in  the  transac- 
tion. 

To  illustrate,  the  broker's  books  might  contain  both 
long  and  short  accounts  in  Steel.  The  credits  on  such 
longs  and  the  charges  against  such  shorts  will  be  made 
by  journal  entry  through  the  blotter.  For  example,  if 
Brown  is  long  of  100  Steel,  and  Jones  is  short  of  the  same 
amount,  then  Brown  receives  credit  in  the  "Amount" 
column  for  $125,  while  Jones  is  charged  the  same  amount. 

A  question  might  be  raised  here  concerning  the  divi- 
dend on  the  100  shares  long.  If  the  broker  registered 
this  stock  in  his  name,  then  he  would  receive  any  dividend 
paid  on  it  while  the  stock  was  so  registered.  If,  however, 
sales  were  made  necessitating  the  delivery  of  these  shares,' 
and  such  delivery  was  made  to  the  purchasing  broker 
while  the  books  were  still  open,  it  is  safe  to  say 
that  an  immediate  transfer  by  the  purchaser  would  follow, 
whereby  the  dividend  would  be  sent  to  the  latter.  If  the 
sale  were  made  before  the  stock  sold  ex-dividend,  and  no 


io8 


STOCK    BROKERAGE 


time  remained  for  a  transfer,  then  the  check  would  be  sent 
to  the  broker  in  whose  name  the  shares  were  registered. 
In  such  case,  this  latter  would  give  a  due  bill  for  the 
amount  of  the  dividend  to  the  broker  who  purchased  the 
Steel. 

Due  Bills 

The  "due  bill,"  mentioned  above,  is  a  form  of  note 
wherein  the  person  receiving  the  dividend  from  the  cor- 
poration promises  to  pay  its  amount  to  the  person  who  is 
entitled  thereto,  and  at  such  time  as  the  same  becomes 
payable. 

The  "Due  Bills  Receivable"  account  represents  items  of 
this  nature  that  will  be  received  whenever  the  dividend  pay- 
ments are  made.  It  is  supported  usually  by  a  schedule  which 
for  each  item  gives  the  names  of  the  brokers  from  whom 
payment  is  expected,  the  description  of  the  stock,  the  number 
of  shares,  and  the  name  of  the  customer  who  is  to  be  credited 
with  the  dividend.  The  Due  Bills  Receivable  account  is 
charged  with  each  item,  and  the  customers  credited  with 
the  sum  to  which  each  is  respectively  entitled.  Also,  a 
"Due  Bills  Payable"  account  appears  on  the  books  to 
evidence  any  similar  liability  to  other  brokers  for  unpaid 
dividends. 

When  stocks  are  borrowed  against  short  sales  of  cus- 
tomers, such  securities  represent  the  long  interests  of  the 
lending  broker.  If  the  stock  were  loaned  before  ex-divi- 
dend time,  the  chances  are  that  the  certificates  have  been 
transferred  into  the  name  of  some  other  broker  in  the 
Street.  Nevertheless,  the  lender  has  a  right  to  any  divi- 
dend declared  on  such  stock,  and  looks  to  the  borrower 
for  the  payment  thereof.  For  the  borrower,  on  the  other 
hand,  such  stock  represents  a  short  interest.  The  cus- 
tomers short  of  the  stock  are  very  frequently  charged 


TRANSACTIONS— PURCHASES   AND   SALES 


109 


with  the  amount  of  the  dividend  as  soon  as  it  is  declared, 
for  the  reason  that  the  liability  is  established  at  the  time 
of  declaration.  The  Due  Bills  Payable  account  is  credited 
with  these  dividends  in  a  lump  sum,  and  is  supported  by  a 
schedule  as  in  the  previous  case.  This  underlying  state- 
ment recites  the  name  of  the  broker  who  is  to  be  paid, 
the  description  of  the  stock,  the  number  of  shares,  and  the 
customer  who  is  charged  therewith.  Usually  the  broker 
issuing  the  due  bill  charges  1%  for  collection. 

All  dividend  stocks  appearing  in  the  securities  ledger 
should  be  kept  in  sight,  so  that  when  notice  of  a  dividend 
on  any  stock  is  received,  the  long  and  short  accounts  in 
that  security  may  be  segregated  and  the  proper  action  be 
taken  in  regard  to  the  dividend. 


* 


CHAPTER    XIII 

TRANSACTIONS    OF   A    STOCK    BROKERAGE 
HOUSE— CUSTOMERS'   ACCOUNTS   AND 

STATEMENTS 

Monthly  Statement 

It  is  the  practice  among  brokers  to  render  monthly  state- 
ments to  all  customers.  This  statement  is  not  to  be  con- 
founded with  the  memorandum  of  purchase  or  sale,  which  is 
sent  to  the  customer  after  the  execution  of  an  order. 

The  ruling  of  the  monthly  statement  (Forms  17,  18, 
and  19)  provides  for  the  date,  explanation,  amount,  and 
total  amount;  also  a  column  for  the  number  of  days  for 
which  interest  is  charged,  and  a  column  for  the  amount  of 
interest  on  each  transaction.  The  debit  and  credit  sides  are 
alike  in  form. 

After  the  net  interest  to  be  charged  or  the  customer's 
credit  is  arrived  at,  it  is  journalized  through  the  blotter  and 
posted  to  the  customer's  account.  From  there,  it  is  carried 
to  the  statement.  At  the  top  of  the  statement  a  space  is 
provided  for  recording  the  interest  rate  at  which  the  charges 
and  credits  have  been  figured. 

Interest  Charges 

The  rendering  of  monthly  statements  involves  two  im- 
portant operations :  ( 1 )  the  determination  of  the  items  on 
which  interest  is  to  be  charged;  and  (2)  the  computation  of 
interest. 

These  operations  can  best  be  illustrated  by  taking  con- 
crete cases.  For  the  purpose,  let  us  take  the  account  of  John 
Jones,  who,  on  January  2,  purchased  on  credit  100  Union 

no 


TRANSACTIONS— CUSTOMERS'  STATEMENTS 


III 


Pacific  at  168,  and  sold  the  stock  on  January  9  at  169  3/8 
(see  Form  17).     For  7  days  this  was  a  long  account.     It 
was  a  simple  account  for  the  reason  that  it  contained  no 
facts  of  opposite  tendencies.      If  on  January  10,  Jones  re- 
quested a  check  in  settlement,  then  the  interest  charge  would 
be  determined  that  day.    Supposing  the  rate  to  be  6%,  the 
the  interest  in  this  case  would  amount  to  $19.61,  i.e.,  the 
interest  for  7  days  at  6%  on  $16,812.50;  and  Jones  would 
be  charged  with  this  amount.     The  interest  period  is  ob- 
tained by  taking  the  elapsed  number  of  days  between  the 
date  on  which  the  Union  Pacific  purchase  is  charged  and 
the  date  on  which  the  proceeds  of  the  sale  are  credited.     As- 
suming that  January  2  was  Monday,  the  day  of  settlement 
would  be  Tuesday,  January  3.    The  date  on  which  the  pro- 
ceeds were  credited  was  the  10th,  consequently  seven  days 
is  the  interval  for  which  interest  is  chargeable. 

Interest  charges  against  customers  are  credited  to  an 
account  known  as  "Interest  on  Customers'  Accounts."  As 
customers  are  not  usually  in  the  habit  of  settling  their  ac- 
counts at  irregular  times,  the  lump  sum  of  interest  charges  is 
usually  credited  at  the  close  of  each  calendar  month.  This 
total  amount  of  interest  is  the  result  of  many  different  opera- 
tions performed  in  connection  with  the  customers'  state- 
ments. 

When  we  come  to  interest  allowances  to  the  customer, 
we  find  that  at  times  he  is  long,  while  at  other  times  he  is 
either  short  or  hedged.  If  on  his  long  transactions  he 
deposits  margin,  then  the  account  is  entitled  to  a  credit  for 
the  interest  on  this  margin.  Thus,  if  John  Jones  made  a 
payment  of  $1,000  on  January  3  (as  assumed  in  Form  18), 
he  would  be  allowed  7  days'  interest  on  this  amount  at  6%, 
and  his  credit  balance  January  10  would  amount  to  $1,092.06 
(debits,  $16,812.50  +  $19.61  interest;  credits,  $1,000  H- 
$16,923 +  $1.1 7  interest). 


112 


STOCK    BROKERAGE 


Suppose  further,  that  on  January  15  Jones  purchased 
100  shares  of  Copper  at  68.  The  time  between  the  last 
transaction  and  this  one  would  cover  a  period  of  6  days. 
During  this  time  Jones'  credit  balance  would  remain  un- 
changed, and  according  to  the  custom  which  prevails,  he 
would  be  allowed  interest  at  the  rate  of  2%  on  this  balance 
($1,092.06)  for  a  period  of  6  days.  Then,  if  the  Copper 
purchase  were  carried  to  the  end  of  the  month  or  longer,  the 
bookkeeper  would  compute  and  enter  the  interest  against 
Jones  up  to  January  31. 

To  review  the  case  in  point  as  to  both  debit  and  credit 
charges,  computation  would  be,  first,  $16,812.50  for  7  days 
at  6%;  then  the  credit  of  $1,000,  representing  the  margin 
deposit  for  7  days  at  6%  ;  then  6  days'  credit  at  2%  on  the 
new  credit  balance  of  $1,092.06;  and  last  a  charge  for  15 
days  on  $5,702  at  6%.  In  other  words,  the  interest  charges 
are  arrived  at  by  considering  the  daily  balances.  On  all 
debits  a  fair  rate  is  charged,  based  on  the  call  money  condi- 
tions, i.e.,  upon  the  average  **call  money"  rate  which  the 
broker  pays  for  the  use  of  funds.  On  credits  2%  is  allowed ; 
this  upon  the  theory  that  the  customers'  money  is  worth  only 
2%  to  the  broker,  since  small  amounts  cannot  be  loaned  out 
at  a  greater  earning. 

No  interest  is  usually  allowed  on  "short  accounts,"  ex- 
cepting on  deposits  treated  as  margin.  In  this  case  a  nomi- 
nal rate  of  2%  is  allowed.  Where  a  customer  is  long  and 
short  at  the  same  time — a  hedged  account — he  is  charged 
with  interest  on  his  long  commitments ;  and  allowed  no  con- 
sideration on  his  short  transactions  unless  they  are  mar- 
gined. This  presupposes  separate  long  and  short  accounts 
in  the  ledger. 

One  feature  peculiar  to  short  accounts  must  be  mentioned 
here.  The  very  large  speculative  accounts  containing  heavy 
short  interests  are  a  source  of  earning  to  the  broker  from  the 


TRANSACTIONS-CUSTOMERS'   STATEMENTS       113 

interest  received  on  borrowed  stocks.  It  is  quite  conceivable 
that  no  personal  outlay  is  made  in  the  case  of  a  short  sale,  for 
with  the  money  which  the  broker  receives  against  delivery, 
he  finances  his  borrowing  operations.  On  this  borrowed 
stock,  interest  is  earned  in  such  quantities  that  some  concerns 
make  it  a  practice  of  dividing  it  with  the  customer.  This, 
however,  is  not  effected  by  the  methods  explained,  but  rather 
by  a  distinct  journal  entry,  charging  "Interest  on  Customers' 
Accounts"  and  crediting  the  short  account  of  the  customer. 

Relation  between  Accounts  and  Statements 

Referring  again  to  the  account  of  John  Jones  (Form 
18),  the  balance  brought  down  under  date  of  January  31  is 
a  debit  of  $5,734.33,  and  on  the  line  below  appears  "Long, 
100  Copper."  If  this  customer  did  not  trade  again  until 
March  1,  then  28  days  of  interest  at  the  prevailing  rate 
would  be  charged  on  the  debit  balance.  Thus  interest  is 
really  compounded.  The  same  method  of  balancing  the  cus- 
tomers' accounts  obtains  in  the  case  of  short  accounts,  but  the 
balance  brought  down  appears  on  the  credit  side  and  a  list  of 
the  short  stocks  is  given. 

Coming  back  to  the  customer's  monthly  statement,  it 
might  be  added  that  an  account  is  rendered  stating  all  short 
transactions,  and  also  one  reflecting  all  the  long  commit- 
ments. The  ledger  account  and  the  statement  must  agree  in 
every  particular,  which  means  that  the  long  stocks  carried 
down  together  with  the  balance  must  agree  with  the  state- 
ment. The  agreement  between  statements  and  accounts 
will  be  seen  if  the  three  monthly  statements.  Forms  17,  18, 
and  19,  are  compared  with  the  three  customers  ledger  ac- 
counts shown  in  Forms  20,  21,  and  22, 


CHAPTER    XIV 

TRANSACTIONS    OF   A    STOCK    BROKERAGE 
HOUSE— CLOSING    THE    BOOKS 

Income 

Income  in  a  brokerage  business  is  derived  from: 

Commissions 

Interest  on  customers'  accounts 

Interest  on  stocks  borrowed 

Premiums 

Expense 

The  expense   items  in   a   brokerage   business  may  be 
divided  into  general  expense  and  solicitors'  expense. 
General  expense  embraces  the  following: 

Rent 

Office  salaries 
Telephone 
Telegraph 
Ticker  service 
Stationery 
Printing 
,    Postage 

Stock  Exchange  dues 

Qearing  house  fees 

Purchase  of  manuals 

Market  reports 

Financial  systems* 

Advertising  (in  periodicals  and  trade  journals) 


TRANSACTIONS-CLOSING  THE  BOOKS 


115 


*Systcms  such  as  supplied  by  Babson  or  Dow  Jones. 

114 


Solicitors'  expense  includes: 

Entertainment  of  customers 
Salaries  of  solicitors  or  agents 
Traveling  expenses 

Very  often,  in  the  conduct  of  branch  offices,  the  keeping 
of  separate  income  and  expense  accounts  is  required,  to 
measure  the  productivity  of  business  coming  from  them. ' 

Omitted  Expenses 

One  important  consideration  in  closing  the  books  of  a 
brokerage  concern  is  the  accounting  for  certain  liabilities  not 
usually  evidenced  by  the  books.  The  care  which  is  exercised 
m  accounting  in  other  businesses  does  not  mark  the  broker's 
office,  and  it  is  not  usually  a  place  where  scientific  methods 
are  followed  in  connection  with  the  peculiar  accounting  sys- 
tem employed.  Often  the  broker  does  not  enter  at  all  the 
many  invoices  which  he  receives  for  miscellaneous  services 
and  supplies,  such  as  stationery,  printing,  telephone,  tele- 
graph service,  and  the  like ;  nor  is  he  apt  to  accrue  interest, 
salaries,  or  rent.  Under  these  circumstances,  the  great  ma- 
jority of  financial  statements  prepared  by  brokers  contain 
nothing  but  cash  factors.  This  practice  is  wrong  and  is 
badly  in  need  of  correction. 

The  broker  is  engaged  in  business  for  the  purpose  of 
making  a  fair  return  on  his  capital.  It  would  be  of  interest 
and  of  value  to  him  to  know  the  cost  incidental  to  the  pur- 
chase or  sale  of  each  100  shares  of  stock ;  what  the  volume  of 
business  was,  and  how  much  was  made  during  the  year. 
Such  information,  if  available  to  the  administrative  head  of 
a  business,  determines  his  future  business  policy,  thus 
making  for  efficiency  and  increased  profits.  For  this  reason 
special  attention  is  given  here  to  the  so  frequently  neglected 
items  of  cost  referred  to  above. 


\ 


ii6 
Accruals 


STOCK    BROKERAGE 


' 


Many  concerns  overlook  the  importance  of  accruals,  be- 
cause the  business,  for  the  most  part,  is  conducted  strictly 
on  a  cash  basis.  This,  however,  does  not  justify  the  neglect 
of  accruals,  for  in  the  face  of  all  statements  in  the  Street  to 
the  contrary,  the  true  condition  of  any  concern  cannot  be 
determined  without  the  aid  of  certain  and  absolute  account- 
ing principles,  and  these  require  the  proper  consideration  of 
accruals  when  the  books  are  to  be  closed. 

Interest  on  interest-bearing  notes  receivable  should  be 
accrued,  and  these  earnings  be  reflected  in  the  period's 
profits.  The  same  rule  should  govern  in  the  case  of  interest 
from  stocks  borrowed,  money  loaned,  or  the  earnings  from 
stocks  loaned  at  a  premium. 

Also,  in  connection  with  income  factors,  it  might  be 
added  that  all  interest  on  bonds  owned  should  be  accrued 
and  brought  into  the  income  statement.  The  interest  on 
customers*  accounts  should  also  be  given  proper  con- 
sideration. 

Salaries  should  be  accrued  and  the  corresponding  lia- 
bility accounts  set  up.  Rent,  and  interest  on  stocks  loaned 
and  money  borrowed  should  be  treated  in  a  similar  manner. 
Any  interest  arising  in  connection  with  notes  payable  which 
the  broker  may  have  outstanding,  should  also  be  included. 

Reserve  Accounts 

Usually  the  capital  contributions  of  a  brokerage  concern 
will  include  securities  whose  value  changes  one  way  or  the 
other  during  the  accounting  period.  If  the  securities  have 
risen  in  value,  conservative  practice  does  not  permit  the 
writing  up  of  the  asset  for  the  purpose  of  increasing  the 
earnings.  If,  on  the  other  hand,  the  value  has  depreciated, 
then  ample  provision  should  be  made  for  such  depreciation, 
the  usual  reserve  account  being  credited  for  the  purpose. 


TRANSACTIONS— CLOSING   THE   BOOKS 


117 


I 


Reserves  should  also  be  set  up  for  the  estimated  amount 
owing  to  sundry  creditors,  and  for  traveling  expenses  of 
solicitors  on  the  road.  Too  often,  the  bills  which  should 
have  found  expression  on  the  books  as  audited  vouchers 
unpaid,  are  allowed  to  burden  the  period  following  that  of 
closing. 

As  the  broker  on  the  floor  of  the  Exchange  might  have 
occasion  to  distribute  some  of  his  business  to  floor  specialists, 
the  commission  payable  thereon  should  not  be  overlooked.* 
The  books  should  show  very  plainly  whether  any  business 
has  been  so  distributed,  and  if  so  shown,  ample  provision 
should  be  made  in  an  account  called  "Floor  Brokerage  Com- 
mission Payable." 

THE    INCOME    STATEMENT 

1.  Income  from  Operation 

In  a  brokerage  business  the  most  important  source  of 
income  is  "commissions."  The  broker  receives  a  commis- 
sion for  his  services  to  customers,  and  he  enters  business 
with  the  purpose  of  earning  such  commission  uppermost  in 
his  mind.  Hence,  this  item  will  practically  measure  the 
amount  of  money  which  has  been  made  in  operating.  An 
independent  commission  account  might  well  be  set  up,  if  for 
no  other  reason  than  for  statistical  purposes. 

All  other  items  of  income,  as  interest  on  customers'  ac- 
counts, premiums,  etc.,  are  brought  in  under  heading  5, 
"Secondary  Income." 

2.  General  and  Administrative  Expenses 

This  section  should  contain  all  expenses  incident  to  the 
operation  of  the  business,  save  solicitors'  and  branch  office 
expenses. 


•$2  is  the  usual  charge  to  a  fellow  broker  for  buying  or  selling  100  shares  of 
stock  of  the  par  value  of  $100,  or  $10,000  of  bonds. 


ii8 


STOCK    BROKERAGE 


3.  Solicitors*  and  Branch  Office  Expenses 

Solicitors*  expenses,  and  those  incidental  to  the  conduct 
of  branch  offices,  are  usually  kept  under  separate  and  distinct 
accounts  for  statistical  purposes.  The  items  usually  in- 
cluded in  these  accounts  are : 

Rent  of  branch  office  or  offices 

Salaries  of  branch  office  managers  and  clerks 

Advertising  of  branch  office 

Entertainment  of  branch  office  customers 

News  ticker  service 

Traveling  expense  of  solicitors 

The  expense  items  under  headings  2  and  3,  represent  all 
the  expense  usually  incident  to  the  general  operation  of  the 
business,  and  they  might  properly  be  grouped  under  the  one 
caption  "Total  Expense." 

4.  Net  Income  from  Operation 

This  is  the  resultant  figure  arrived  at  by  deducting 
Total  Expense"  from  "Income  from  Operation." 

5.  Secondary  Income 

Under  this  heading  should  be  listed  interest  earned  in 
financing  customers'  transactions.  The  usual  items  oi 
secondary  income  are : 

Interest  on  customers'  accounts 

Interest  on  notes  receivable 

Interest  on  stocks  borrowed 

Premiums  on  stocks  loaned 

Interest  earned  on  bonds  held  as  investment 

Dividends  on  stocks  held  as  investment 

6.  Deductions  from  Income 

This  heading  embraces  such  items  as : 


(( 


TRANSACTIONS— CLOSING   THE   BOOKS 


119 


f- 


Interest  on  stock  loans  equivalent  to  borrowed  money 
Interest  on  money  borrowed 
Interest  on  notes  payable 

Premiums  on  stocks  borrowed  are  chargeable  to  the 
customer  short  of  such  stock. 

7.  Net  Income  from  All  Sources 

The  difference  between  "Secondary  Income"  and  "De- 
ductions from  Income"  gives  the  addition  to,  or  deduction 
from,  "Net  Income  from  Operations,"  and  gives  the  total 
net  income  from  all  sources. 

8.  Profit  and  Loss  Charges 

These  charges  should  include  a  reserve  provision  for 
doubtful  accounts  receivable,  wherever  such  accounts  exist; 
a  reserve  provision  for  depreciation  of  furniture  and  fix- 
tures (and  in  large  banking  offices  this  is  an  important 
item) ;  a  reserve  provision  for  expenses  in  connection  with 
the  business  in  general ;  and  provision  for  any  loss  incurred 
on  the  sale  of  securities  which  were  held  for  investment. 

g.  Distribution  of  Profit 

The  distribution  of  any  remaining  profit  would  be  a 
last  factor  in  connection  with  the  income  statement. 

THE  BALANCE  SHEET 

Balance  Sheet  Items 

The  arrangement  of  the  assets  and  liabilities  on  the 
balance  sheet  of  a  brokerage  house  does  not  differ  from 
the  arrangement  usually  employed  by  accountants.  There 
are  items,  however,  appearing  in  the  broker's  balance  sheet 
which  do  not  mean  the  same  as  they  would  on  the  ordi- 
nary balance  sheet,  but  present  apparent  contradictions  in 


^ 


I20 


STOCK    BROKERAGE 


that  they  do  not  take  into  account  the  equity  arising  in  cus- 
tomers' accounts  or  in  collateral  loans. 

Assets 

The  asset  side  of  the  balance  sheet  is  subdivided  into : 

1.  Capital  Assets 

2.  Current  Assets 

3.  Deferred  Debits  to  Income 

Under  the  first  heading,  "Capital  Assets,"  appear  such 
items  as  exchange  seats,  investment  in  securities,  and  furni- 
ture and  fixtures. 

The  second  heading,  "Current  Assets,"  embraces  cash, 
accounts  receivable,  notes  receivable,  stocks  borrowed,  and 
all  accrued  interest  items.  The  accounts  receivable  recite 
no  definite  financial  truth  unless  read  in  connection  with 
the  table  of  equities,  a  table  showing  the  amount  of 
margin  which  each  customer  maintains  on  his  commitments 
(Form  24). 

The  third  subdivision  of  assets,  "Deferred  Debits  to 
Income,"  includes  such  items  as  rent  paid  in  advance; 
advertising  paid  in  advance;  Stock  Exchange  dues  paid 
in  advance ;  and  all  similar  items  which  have  to  be  analyzed 
for  the  purpose  of  determining  the  portion  applicable  to 
the  accounting  period. 

Liabilities 

All  liabilities  are  current  in  nature.  There  are  no 
deferred  credit  items  nor  capital  liabilities.  Stock  loans, 
accounts  payable  (which  usually  are  deposit  accounts  or 
open  credit  accounts),  interest  accruals,  and  salaries  ac- 
crued, all  appear  under  the  single  caption,  "Liabilities." 

Proprietors'  Accounts 

The  proprietorship  section  of  the  balance  sheet,  com- 


TRANSACTIONS-CLOSING  THE  BOOKS 


121 


I 


I 


I 


prising   reserves   and   partners'   capital   accounts,   is   self- 
explanatory. 

Table  of  Equities 

The  table  of  equities  (Form  24)  sometimes  referred 
to  as  the  "Equity  Statement,"  "Statement  of  Margins," 
or  "Statement  of  Equities,"  is  a  most  important  supple- 
ment to  the  balance  sheet.  Its  purpose  is  to  present  the 
status  of  each  account  into  which  might  enter  the  considera- 
tion of  margin  in  favor  of,  or  against,  the  customer. 

It  will  be  recalled  that  some  accounts  operate  under  a 
credit  arrangement.     Suppose  such  an  account  is  long  of 
5,000  Steel  at  65,  the  purchase  price,  and  that  the  present 
market  price  is  60.     How  does  this  affect  the  balance  sheet  ? 
The  ledger  balance  in  this  case  shows  approximately  a  debit 
of  $325,000,  the  securities  appearing  as  5,000  Steel.      It 
is  obvious  that  this  does  not  reflect  the  true  condition  of 
the  account,  but  as  all  the  stock  accounts  receivable  are 
grouped  together  in  the  balance  sheet,  it  is  practically  im- 
possible to  segregate  any  particular  account  from  the  mass. 
From  the  broker's  point  of  view,  the  statement  of  the 
account  is  correct,   as  the   stock  accounts   receivable  are 
considered  absolutely  good.     But  would  the  bank  cashier 
who  has  occasion  to  review  the  balance  sheet  (that  being 
the  basis  for  future  loaning  operations),  so  consider  them? 
Surely  the  facts  are  confusing— even  misleading.     But,  as 
a  corrective,  the  table  of  equities  discloses  the  true  condi- 
tion of  this  and  every  other  account  .carried  on  the  books 
of  the  broker.     On  this  the  true  condition  of  the  account 
IS  shown,  and  the  amount  representing  the  accounts  re- 
ceivable is  thereby  modified  by  at  least  $25,000. 

The  arrangement  of  the  table  of  equities  is  such  as  to 
show,  in  each  case,  the  name  of  the  account  receivable; 
the  number  of  shares  long  and  short;  market  price  and 


122 


STOCK    BROKERAGE 


market  value;  the  ledger  balance,  debit  or  credit;  and  the 
margin,  debit  or  credit.  If  it  be  an  open  credit  account, 
then  the  ledger  credit  and  the  margin  credit  would  be  the 
same.  If  it  were  an  open  debit,  considered  perfectly  col- 
lectible, then  the  amount  appearing  in  the  ledger  debit 
column  would  again  appear  in  the  margin  debit  column. 

By  this  "refining '  process,  the  accounts  receivable,  as 
represented  on  the  balance  sheet  and  as  shown  on  the 
equity  statement,  are  contrasted  as  to  money  values.  This 
is  done  by  footing  the  two  margin  columns,  the  difference 
between  the  debit  and  credit  sides  representing  the  equity 
due  to  customers  or  due  the  house  from  customers. 

Every  account  is  treated  on  this  statement  in  such  a 
way  that  the  ledger  columns  really  present  the  balance 
sheet  accounts,  while  the  equity  columns  reveal  the  bal- 
ance and  margins  of  each  individual  account  as  assets  or 
liabilities. 

Combination  Equity  Statement  and  Balance  Sheet 

Very  often,  instead  of  the  standard  form  of  balance 
sheet,  a  combination  of  the  equity  statement  and  balance 
sheet  is  employed.  On  such  a  combination  statement,  the 
facts  and  figures  are  thrown  into  contrast,  and  the  result 
is  a  true  presentment  of  the  broker's  affairs. 

In  the  preparation  of  this  combined  sheet  it  may  be 
said  in  brief  that,  as  each  balance  is  struck  in  the  ledger, 
the  amount  of  equity  which  the  broker  or  the  customer 
retains  in  the  asset  or  liability  is  listed.  For  example,  in 
his  cash  account,  the  broker  would  have  100%  equity.  In 
a  stock  account  receivable,  the  customer's  equity  would  be 
shown  in  his  margin  statement.  The  amount  of  margin 
which  a  broker  retains  in  collateral  loans  is  shown  on  the 
liability  side  of  the  balance  sheet  in  the  debit  column. 


•  m 


CHAPTER    XV 
FAILURE   AND   DISSOLUTION 

Voluntary  Dissolution 

Brokerage  houses  are  usually  partnerships,  and  their 
voluntary  dissolution  is  easily  accomplished  by  the  mutual 
consent  of  the  partners.  '  c 

Under  the  law  of  partnership,  dissolution  may  also  be 
brought  about  by : 

1.  The  expiration  of  the  term  as  stated  in  the  articles 
»     of  copartnership. 

2.  The  death  of  a  partner. 

3.  The  insanity  of  a  partner. 

4.  The  assignment  of  a  partnership  interest  to  third 

persons. 

Very  often  the  Street  enters  upon  a  period  of  depres- 
sion, and  usually  before  it  ends,  a  number  of  brokerage 
firms  tire  of  the  inactivity  it  entails.  Rents  are  high  and 
other  business  expenses  are  heavy,  and  the  losses  are  cor- 
respondingly large.  Recourse  is  then  had  to  voluntary 
dissolution.  In  that  case  the  customers  are  notified  of  the 
firm's  intention  to  discontinue,  and  a  request  is  made  for 
the  settlement  of  all  open  accounts.  This  is  made  possible 
either  by  "taking  up"  the  accounts  or  transferring  them 
to  some  other  broker.  The  assets  remaining  are  distributed 
among  the  partners,  and  the  business  is  dissolved. 

Involuntary  Dissolution 

Involuntary  or  forced  dissolution,  on  the  other  hand, 
is  a  more  troublesome  proposition.  Sometimes,  this  con- 
dition is  an  outgrowth  of  untoward  influences  such  as 

123 


124 


STOCK    BROKERAGE 


FAILURE    AND    DISSOLUTION 


125 


panics  or  business  depressions.  In  most  instances,  how- 
ever, it  arises  through  speculation  on  the  part  of  the  firm 
itself,  which  endangers  its  clients'  funds  by  taking  "fliers" 
in  the  market.  If  insolvency  or  bankruptcy  does  not  result 
directly  from  such  speculations,  the  Stock  Exchange  may 
intervene  in  the  "private  operations"  of  the  firm,  and  ex- 
pulsion or  suspension  result.  What  is  more,  the  offenders 
are  liable  to  their  customers  in  actions  for  conversion. 

When,  in  such  a  case,  bankruptcy  proceedings  are  in- 
stituted against  the  brokerage  firm,  several  nice  legal  ques- 
tions enter  the  case,  the  essence  of  which  is  the  status  of 
the  customers  as  creditors  of  the  firm,  and  the  relation 
of  other  brokers  to  the  bankrupt. 

Release  of  Securities  Held  by  Bankrupt 

When  a  brokerage  firm  goes  bankrupt,  the  most  im- 
portant question  to  be  answered,  and  one  which,  no  doubt, 
concerns  the  customer  most,  is  how  can  he  "lift^*  the  ac- 
count or,  in  other  words,  release  the  equity  in  his  securities. 
There  are  several  cases  in  law  which  cover  this  point.*  In 
the  matter  of  Meadows,  Williams  &  Co.,  177  Fed.  1004, 
it  was  held  that  where  the  identical  certificates  of  stocks 
or  other  evidences  of  ownership  purchased  in  execution 
of  a  customer's  order  are  traceable,  he  can,  by  payment  of 
his  debit  balance,  have  his  securities  released  to  him.  If, 
perchance,  the  securities  have  not  been  pledged,  but  are 
carried  by  the  broker,  the  customer  may  succeed  in  his 
claim  for  the  securities,  although  it  is  impossible  to  estab- 
lish the  identity  of  the  certificates. 

It  was  also  held  in  this  case  that  wherever  the  securi- 
ties carried  by  the  broker  represent  the  holdings  of  several 
customers  in  the  same  stock — although  the  certificates  be 
not  possible  of  identification  —  each  customer  has  a  just 

♦See  Douglas  Campbell's  "Law  of  Stock  Brokers"  for  these  and  other  cases 
•*•  point* 


Ui 


claim  to  his  pro  rata  share  upon  payment  of  an  amount 
sufficient  to  release  the  securities.  Also,  if,  at  the  time  of 
failure,  the  broker  has  in  his  possession  all  the  securities 
represented  by  customers'  accounts,  each  customer  may  re- 
lease his  equity  by  paying  the  amount  of  his  book  balance 
to  the  assignee  or  trustee  in  bankruptcy. 

In  the  case  of  Chamberlain  v.  Greenleaf,  4  Abb.  N.  C. 
178,  it  was  held  that,  if  the  securities  be  pledged  to  a  third 
party  to  secure  a  loan  to  the  bankrupt,  and  these  securi- 
ties be  distinct  and  separate  from  all  other  securities,  the 
customer  may  release  his  equity  upon  payment  to  the  pledgee 
of  the  amount  secured  by  such  stock,  and  payment  of  any 
differences  in  the  account  to  the  legal  representative  of  the 
bankrupt. 

In  the  case  of  Gould  v.  Central  Trust  Companv,  6  Abb. 
N.  C.  381,  it  was  held  that  when  customers'  securities  have 
been  mingled  in  one  bulk  and  pledged,  the  customers  can 
release  their  holdings  by  paying  their  pro  rata  shares  so 
that  the  total  will  equal  the  amount  covered  by  the  pledge ; 
and  any  differences  are  to  be  paid  to  the  estate  of  the  bank- 
rupt. The  court  further  ruled  that,  if  a  part  of  the  securi- 
ties shall  have  been  sold  in  satisfaction  of  a  prior  lien  of 
the  pledgee,  the  balance  t)f  the  securities  may  be  disposed 
of,  and  the  funds  realized  therefrom  distributed  on  a  pro 
rata  basis  among  the  various  customers  whose  securities 
made  up  the  loan,  without  the  necessity  of  first  determining 
which  set  of  customers  owned  the  securities  which  were  sold 
in  satisfaction  of  such  lien. 

Of  course,  the  principles  of  equity  as  well  as  the  doc- 
trine of  marshalling  in  the  case  of  bankruptcy,  would  require 
that  the  broker's  securities  (which  together  with  the  cus- 
tomers' securities  constitute  the  collateral  in  a  loan)  be  first 
disposed  of  before  any  of  the  customers'  shares  be  disposed 
of  to  satisfy  a  lien. 


126 


STOCK    BROKERAGE 


Customers*  Equity  in  Deposited  Securities 

In  the  matter  of  Mills,  125  App.  Div.  730;  193  N.  Y. 
626  (1908),  a  situation  arose  where  a  customer  deposited 
with  his  broker  securities  as  margin  on  a  running  account. 
These  securities  were  pledged  in  order  to  raise  funds,  and 
subsequently  it  was  contended  that  such  stocks  and  bonds 
had  no  priority  over  securities  that  were  purchased  origi- 
nally on  margin.  The  court  ruled  that  there  was  no  dis- 
tinction between  securities  deposited  as  margin  and  securi- 
ties which  found  their  way  into  a  loan  through  purchase  on 
margin. 

It  would  appear,  however,  that  if  the  securities  were 
deposited  for  safe  keeping  and  pledged  without  the  knowl- 
edge or  consent  of  the  owner,  such  owner  could  insist  upon 
the  sale  of  securities  bought  on  margin  before  any  disposi- 
tion could  be  made  of  his  holdings.  If  it  occurred  that 
his  securities  were  sold  before  the  others,  he  could  demand 
the  disposition  of  the  remaining  securities  in  order  that 
restitution  be  made  to  him  to  cover  the  fair  value  of  his 
stocks  or  bonds. 

If  it  be  evidenced  that  collusion  existed  between  the 
pledger  and  the  pledgee,  and  because  of  this  the  securities 
owned  by  an  innocent  third  party  were  disposed  of  to  sat- 
isfy a  lien,  then  such  innocent  third  person  would  be  sup- 
ported in  his  claim  to  recover  full  value. 

Equity  in  Clearance  Loans 

In  the  case  of  the  Mechanics*  National  Bank  v.  Ernst, 
it  was  decided  by  the  United  States  Supreme  Court  No- 
vember 3.  1913,  that  clearance  loans  carried  with  them 
no  superior  equities  in  securities  which  such  loans  helped 
to  procure.  It  was  ruled  that  the  bank  was  only  a  general 
creditor  and  was  entitled  to  share  as  such. 

Generally  speaking,  the  National  Bankruptcy  Act  gov- 


FAILURE    AND    DISSOLUTION 


127 


erns  almost  exclusively  all  actions  for  the  recovery  of  securi- 
ties when  the  broker  has  been  adjudicated  a  bankrupt. 

Disposal  of  Broker's  Stock  Exchange  Seat 

In  regard  to  the  bankrupt  broker's  membership  on  the 
Exchange,  Sections  1  and  3  of  Article  XVI  of  the  consti- 
tution  of  the  New  York  Stock  Exchange,  provide  as  follows : 

"A  member  who  fails  to  comply  with  his  contracts  or 
is  insolvent,  or  who  is  a  partner  in  a  firm  registered  upon 
the  Exchange  which  fails  to  comply  with  its  contracts  or 
is  insolvent,  shall  immediately  notify  the  President,  in 
writing,  that  he  or  his  firm  is  unable  to  meet  their  engage- 
ments, or  prompt  notice  thereof  shall  be  given  to  the  Ex- 
change. He  shall  thereby  become  suspended  from  mem- 
bership until,  after  having  settled  with  his  creditors  or  the 
creditors  of  his  firm,  he  has  been  reinstated  by  the  Com- 
mittee on  Admissions.  If  a  member  suspended  under  this 
article  fails  to  settle  with  his  creditors  and  apply  for  rein- 
statement within  one  year  from  the  tijme  of  his  suspension, 
his  membership  shall  be  disposed  of  by  the  Committee  on 
Admissions." 

Before  the  customers  may  share  in  the  funds  realized 
from  the  sale  of  the  Exchange  seat,  all  the  claims  of  mem- 
bers of  the  Exchange  shall  have  first  been  paid.  Any 
surplus  remaining  thereafter  is  distributable  among  the 
respective  creditors  of  the  firm  and  of  the  partners 
individually. 


In  summing  up  it  may  be  said  that  there  are  many 
other  features  and  conditions  of  the  broker's  bankruptcy 
which  are  too  technical  for  discussion  here.  Only  a  few 
cases  have  been  cited  as  illustrative  of  the  more  important 
phases  of  the  question  and  as  indicating  the  status  of  cus- 
tomers in  the  capacity  of  creditors.     Almost  daily,  prob- 


128 


STOCK    BROKERAGE 


lems  are  met  in  which  a  knowledge  of  the  law  is  invaluable 
to  the  accountant  whose  duty  it  is  to  ascertain  the  equities 
of  customers  of  a  defunct  brokerage  concern,  and  for  such 
accountants  a  fair  knowledge  of  the  law  and  procedure  in 
such  cases  is  essential. 


Part  II — Cotton  Brokerage 


CHAPTER    XVI 

THE  COTTON  FUTURES  MARKET 

The  Market 

The  cotton*  futures  market  plays  an  important  role  in 
the  disposition  of  the  annual  cotton  crop.  It  is  the  medium 
for  distributing  approximately  15,000,000  bales  yearly, 
which,  resolved  into  terms  of  money,  gives  $1,050,000,000, 
figuring  the  average  price  of  cotton  at  14-  cents  per  pound. 
The  system  of  "Futures"  facilitates  the  movement  of  cotton 
from  planter  to  spinner  and  thence  to  consumer. 

Cotton  brokers  are  engaged  in  trading  for  either  "spot" 
delivery  or  "future"  delivery.  The  former  involves  but 
very  little  accounting,  and  is  treated  in  Chapter  XXV. 
The  accounting  requirements  of  the  futures  market  are, 
on  the  other  hand,  peculiar,  and  the  mechanism  of  its  ac- 
counts and  the  relations  between  them  are  intricate. 

Expressed  briefly,  the  futures  market  is  a  system  of 
trading  in  cotton  options,  the  commodity  itself  being  either 
potentially  or  actually  existent,  but  not  deliverable  until  the 
time  specified  in  the  contract.  The  active  issues  or  options 
traded  in  are  those  of  January,  March,  May,  July,  August, 
October,  and  December.  An  option  for  any  of  these  months 
may  be  traded  in  up  to  the  last  "tender  day"  of  the  pre- 
ceding month,  this  last  tender  day  being  the  time  set  by 
the  Cotton  Exchange  for  the  expiration  of  the  options  for 
a  certain  month  and  the  ceasing  of  trading  in  such  com- 
mitments.    For  example,   January,    1916  cotton  may  be 

129 


I30 


COTTON    BROKERAGE 


bought  or  sold  up  to  the  last  tender  day  in  December,  1915 ; 
or  May,  1916  cotton  may  be  traded  in  up  to  the  last' tender 
day  in  April,  1916. 

If  January,  1916  cotton  is  purchased,  the  commodity 
would  be  tendered  on  or  about  December  31,  1915,  and 
the  purchaser  would  be  called  upon  at  that  time  to  make 
payment  against  the  delivery  to  him  of  a  warehouse  receipt. 
On  the  other  hand,  if  the  buyer  wishes  to  dispose  of  his 
holdmgs  of  January  cotton,  he  might  do  so  at  any  time 
before  the  last  tender  day. 

Most  of  the  buying  and  selling  of  cotton  futures  is  for 
speculative  purposes,  i.e.,  the  customer  does  not  wish  to 
buy  cotton  and  has  none  to  sell.  In  such  case,  when  his 
commitment  falls  due,  settlement  must  be  made  in  some 
other  way  than  by  the  actual  receipt  or  delivery  of  cotton, 
and  this  must  be  done  on  or  before  the  last  tender  day. 

A  customer  having  a  long  interest  in  the  market  will 
usually  sell  his  cotton  for  the  outgoing  month,  and  if  he 
wishes  to  retain  his  long  interest,  will  purchase  in  lieti 
thereof   futures   for   some  other  months.      For   example 
assume  that  John  Doe  is  long  of  March.    Being  compelled 
to  sell  out  his  "longs,"  he  sells  March  cotton,  thereby  satis- 
fying his  March  contract;  and,  wishing  to  retain  his  long 
interest  in  the  market,  buys  May.     Or  suppose  that  John 
Brown  IS  short  of  March.     Being  compelled  to  buy  in  by 
reason  of  the  approaching  expiration,  he  buys  March  and 
sells  May,  thereby  retaining  his  short  interest.     In  these 
cases  It  IS  tak^n  for  granted  that  Brown  did  not  intend 
dehvering  his  March  contracts,  and  that  Doe  did  not  con- 
template the  actual  receipt  of  his  March  commitments  •  and 
not  intending  to  deliver  or  receive  the  cotton,  it  becomes 
compulsory  for  them  to  settle  the  contract  by  sale  or  pur- 
chase  of  the  maturing  options. 
,       Mills  which  sell  a  good  deal  of  their  output  on  contract 


THE    COTTON    FUTURES    MARKET  131 

at  a  certain  price,  use  the  futures  market  for  hedging  pur- 
poses.    If  the  price  of  raw  cotton  rises  after  a  mill  sells 
its  product  and  before  the  goods  are  manufactured,  the 
mill  will  lose  the  difference  between  the  increased  price  and 
the  price  of  raw  cotton  at  the  time  it  entered  into  the 
contract  of  sale.    To  prevent  such  losses  on  advance  sales, 
the  mills,  as  stated,  will  usually  hedge  by  purchasing  a  suffi- 
cient  number  of  bales  of  futures  to  protect  themselves 
against  any  increase  in  the  price  of  the  raw  material.    When 
this  is  done,  if  the  price  of  cotton  rises,  the  loss  incurred 
by  the  increased  price  of  the  raw  material  is  offset  by  the 
profit  reflected  in  the  cotton  bought  on  futures.     If,  on 
the  other  hand,  cotton  falls,  the  additional  profit  this  ^ves 
them  on  the  manufactured  product  offsets  the  loss  on  the 
futures.     Thus  the  "futures'*  purchase  serves  the  purpose 
of  a  stabilizer  or  insurance  against  loss.    Spot  cotton  dealers 
use  the  futures  market  much  in  the  same  manner. 

An  additional  function  which  the  futures  market  per- 
forms is  the  maintenance  of  a  ready  market  for  cotton 
having  as  a  measure  for  its  prices  the  effective  demand  fori 
and  the  real  supply  of,  "classified  raw"  cotton.  It  elimi- 
nates the  very  wide  and  arbitrary  fluctuations  of  prices 
that  would  otherwise  occur. 

Customs  of  the  Futures  Market 

According  to  the  rules  set  down  by  the  New  York 
Cotton  Exchange,  cotton  is  traded  in  for  future  delivery 
in  quantities  of  not  less  than  100  bales,  each  100  bales,  in 
technical  terms,  constituting  "one  contract."  On  this  basis 
1,000  bales  of  cotton  are  equivalent  to  10  contracts.  Fur- 
thermore, the  Exchange  has  specified  the  weight  per  bale 
as  500  pounds.  Therefore,  one  contract,  or  100  bales  is 
of  the  approximate  weight  of  50,000  pounds.  The  price 
of  cotton  is  quoted  in  terms  of  cents  and  hundredths  of  a 


132 


COTTON    BROKERAGE 


cent  per  pound.  One  cent  on  100  bales  is  equivalent  to 
$500.  One  one-hundredth  of  a  cent  on  the  contract  equals 
$5.  A  fluctuation  of  1/100  of  a  cent  is  known  as  a  point, 
so  that  a  point  is  equivalent  to  $5  per  contract. 

The  only  cash  transactions  in  the  futures  market  are 
those  in  spot  cotton.  All  other  transactions  are  settled  by 
means  of  the  "differences"  system  which  has  as  its  chief 
features  a  cash  payment,  or  receipt,  for  the  difference  be- 
tween the  price  paid  for  the  cotton  and  the  price  which  it 
yields  upon  sale.  Thus,  if  a  customer  purchases  100  bales 
of  cotton  at  13.08  cents  per  pound,  and  sells  it  at  13.20  cents 
per  pound,  he  will  gain  the  difference  of  12  points,  or  $60, 
as  a  result  of  the  deal.  Figuring  this  by  the  ordinary 
method  of  calculating,  the  contract  of  50,000  pounds  at 
13.08  cents  per  pound  would  cost  $6,540.  At  13.20  cents 
it  would  yield  $6,600,  or  a  profit  difference  of  $60. 

Books  of  Account 

Two  distinct  sets  of  books  are  kept  by  the  cotton  broker, 
the  one  dealing  with  the  transactions  of  the  customers  and 
the  other  with  the  same  transactions  from  the  Street  end, 
i.e.,  the  dealings  between  brokers.  Only  by  a  system  of 
interlocking  between  the  two  sets  of  books  is  a  check  upon 
the  Street  books  made  possible.  Reference  to  this  point 
will  be  made  later  (Chapter  XXI). 

The  Customers'  Records 

The  books  used  for  the  record  of  transactions  with 
customers  are  as  follows : 

Purchases  and  Sales  Book 
Customers  Margin  Book 
Customers  Contract  Book 
Customers  Ledger 


THE    COTTON    FUTURES    MARKET 


133 


General  Journal 

General  Ledger 

Cash  Book 

Account  Sales  Register,  or  Contract  Analysis  Journal 

The  Street  Records 

The  transactions  between  brokers  arcf  sr  reflection  of 
their  customers'  dealings,  and  the  purchases  and  sales  book 
is  the  basis  for  transferring  the  contracts  traded  in  to  the 
Street  records.  Nothing  should  appear  in  any  of  the  Street 
books  which  cannot  be  traced  either  to  the  purchases  and 
sales  book  or  to  the  Street  blotter.  The  purchases  and 
sales  book  therefore  enters  into  both  the  customers'  and 
the  Street  records.  The  complete  set  of  Street  records  is 
as  follows: 

Purchases  and  Sales  Book 

Street  Blotter 

Street  Ledger 

Street  Margin  Ledger 

Street  Settlement  Book,  or  Brokers'  Statement 


i 


CHAPTER    XVII 

CUSTOMERS'  RECORDS 

Purchases  and  Sales  Book 

The  ruHng  and  arrangement  of  this  record  (Form  25), 
does  not  vary  in  any  material  way  from  the  similar  book 
used  in  the  stock  brokerage  business.  The  headings  of  the 
columns  are  practically  the  same,  though  the  caption  of 
the  column  on  either  side  of  the  book  changes  from 
"Number  of  Shares"  to  "Bales." 

Customers  Margin  Book 

The  principles  underlying  the  system  of  margins  in  the 
cotton  market  are  the  same  as  in  the  stock  market,  so  that 
the  same  card  system  or  loose-leaf  device  can  be  installed 
with  good  results.     Form  26  shows  a  typical  loose-leaf 
margin  sheet  employed  by  cotton  brokers.     Custom  has 
dictated  40  points,  or  $200,  as  a  safe  margin  on  one  con- 
tract, and  conservative  brokerage  concerns  call  for  addi- 
tional margin  when,  at  the  market  price,  one-half  of  the 
existing  margin  is  consumed  by  paper  losses.    For  instance, 
if  the  customer,  John  Brown,  purchased  100  January  at 
13.08,  4  points   for  commission  are  immediately  added, 
making  the  price  to  him  13.12.     If  the  price  of  January 
declines  11  points,  or  $55,  this  potential  or  paper  loss  is 
subtracted   from  the  margin  which  Brown  deposited  on 
account  of  his  purchase.    Assuming,  then,  that  Brown  had 
originaUy  a  ledger  credit  of  $200,  the  remainder  of  his 
margin  is  $145,  or  29  points,  and  is  still  sufficient  to  carry 
the  account.     If,  however,  the  price  for  January  declined 
to  12.92,  Brown  would  be  called  on  for  $100  additional 

134 


CUSTOMERS'   RECORDS 


135 


margin.  If  he  failed  to  respond  after  a  reasonable  time 
(depending  altogether  upon  the  condition  of  the  market 
to  gauge  the  expression  "reasonable"),  an  order  would  be 
entered  to  sell  100  January  at  12.72  on  "stop,"  this  mean- 
ing that  when  the  price  of  January  fell  to  12.72,  the  order 
would  be  executed  at  that  price  for  the  option.  Having 
purchased  the  contract  at  13.12  (including  commission), 
and  sold  it  at  12.72,  Brown's  loss  thereon  would  be  40 
points,  or  $200. 

It  should  be  noted  here  that  an  entire  contract  cam- 
prises  both  the  purchase  and  sale  of  a  commitment,  and 
that  the  commission  of  $20  covers  both  purchase  and  s^e 
or  deliverv. 

Customers  Contract  Book 

Form  27  shows  a  sheet  from  the  customers  "contract 
book.  This  book  is  entered  from  the  purchases  and  sales 
book.  Each  customer  has  one  page  allotted  to  him,  and 
the  ruling  provides  for  the  classification  of  the  options 
bought  and  sold,  the  date  of  each  transaction,  and  the  prices 
paid  and  received.  There  is  also  a  column  providing  for 
the  insertion  of  an  "Account  Sales"  number.  Each  con- 
tract is  entered  on  a  separate  line.  Thus,  the  record  of 
10  contracts  purchased  is  expressed  by  10  separate  entries, 
even  though  the  entire  purchase  was  made  at  one  time. 
This  is  done  to  obviate  any  error  in  closing  or  setting  off 
such  purchases,  and  to  make  possible  the  recording  of 
account  sales  numbers.  These  account  sales  may  be  ren- 
dered at  ten  different  times,  depending  upon  the  manner 
in  which  the  purchases  are  disposed  of,  or  the  short  sales 
covered.  They  may  be  closed  all  at  once  or  at  intervals 
of  days. 

All  transactions  are  classified  according  to  the  options 
involved.      Thus,  any  dealings  in  the  option,  May,  1915, 


iill 


M- 


\i 


136 


COTTON    BROKERAGE 


would  be  classified  in  the  column  headed  May,  1915.  Simi- 
larly, all  purchases  or  sales  of  other  months  would  be  classi- 
fied in  their  respective  columns. 

A  loose-leaf  device  gives  the  best  service  in  this  particular 
book.  Since  it  is  tabbed  alphabetically,  the  customers'  ac- 
counts can  also  be  arranged  in  that  manner.  Furthermore, 
the  book  can  be  expanded  or  contracted — sl  most  convenient 
and  desirable  feature  in  this  line  of  business,  since  "dead" 
accounts  can  be  removed  to  the  transfer  binder,  while  the 
active  accounts  are  allowed  to  remain. 

As  will  be  noted  (Form  27),  no  monetary  column 
appears  other  than  that  for  entering  the  price  per  pound. 
As  may  be  inferred  from  this,  the  customers'  accounts  in 
the  ledger  are  not  charged  with  the  cost  of  purchases  nor 
with  the  proceeds  of  sales,  but,  as  will  be  seen  later,  reflect 
only  the  profit  or  loss  difference.  For  example,  if  John 
Jones  purchased  100  January  at  13.08  and  sold  100  at  13.20, 
his  account  would  not  be  charged  with  $6,540  nor  credited 
with  $6,600,  but  is  credited  with  his  profit  of  $60.  There- 
fore, this  customers  contract  record  contains  only  the  options 
of  customers,  having  no  regard  for  the  money  values  in- 
volved beyond  the  mere  record  of  the  price  per  pound. 

This  characteristic  of  the  cotton  futures  business  em- 
phasizes the  "diflFerence"  method  employed  in  charging  or 
crediting  accounts  by  reason  of  purchase  or  sale  of  futures. 
All  the  commodity  futures  markets  are  operated  in  the 
same  manner,  i.e.,  through  the  ''differences"  method  out- 
lined above.  The  system  is  employed  because  it  is  con- 
venient, accurate,  and  wholly  in  line  with  the  custom  of  the 
business. 

Opposed  to  this  method  of  accounting,  is  that  of  charg- 
ing the  customer  with  the  amount  of  his  purchase,  and 
crediting  simultaneously  the  Contract  Differences  account. 
This  is  correct  in  principle,  perhaps  even  more  so  than  the 


/ 


CUSTOMERS'   RECORDS 


137 


method  in  vogue,  for  the  reason  that  it  shows  the  actual 
debt  by  the  customer  who,  it  is  always  supposed,  will  pay 
for  his  contract  at  the  time  of  delivery.  By  crediting  the 
Contract  Differences  account,  the  liability  with  the  Street 
is  set  up,  and  at  delivery  time  is  discharged  by  payment. 
The  same  result  is  accomplished  as  in  the  first  case,  with 
the  additional  advantage  that  the  contracts  or  options  find 
expression  in  a  financial  way.  The  first  method,  however,  is 
supported  by  the  two  very  logical  reasons  stated  in  the 
following  paragraphs : 

1.  The  contract  is  purely  an  option  for  the  receipt  or 
delivery  of  a  specified  month's  cotton.  This  cotton  may  or 
may  not  be  received  or  delivered  by  the  contracting  parties. 
In  view  of  the  doubt  which  exists  on  the  part  of  the  cus- 
tomer as  to  his  intention  of  effecting  receipt  or  delivery, 
no  charge  should  be  set  up  against  him.  If  eventually  he 
means  to  avail  himself  of  the  option  he  holds,  and  expresses 
this  intention,  then  it  would  seem  that  a  charge  for  the  pur- 
chase and  a  corresponding  liability  to  the  Street  would  be 
warranted. 

2.  In  case  of  a  sale,  the  planter  or  the  speculator  making 
commitments  may  not  intend  to  make  delivery  against  the 
sale.  It  might  be  that  the  sale  was  made  for  hedging  pur- 
poses or  as  a  short  "flier"  in  the  market.  Or  the  purchaser, 
say  a  spot  man,  may  have  entered  the  futures  market 
merely  to  avoid  any  possible  loss  from  a  rise  in  the  price 
of  spot  cotton  after  contractual  relations  have  been  entered 
into  between  the  spot  man  and  the  mill.  If  the  credit  to 
the  customer  and  a  corresponding  charge  in  the  Street 
records  were  set  up,  it  would  reflect  entries  which  at  best 
would  express  but  contingencies. 

For  such  reasons,  it  is  obvious  that  nothing  is  lost  or 
misstated  by  treating  option  transactions  by  the  first  method 
of  accounting. 


II 


j' 


I 


138  COTTON    BROKERAGE 

Customers  Ledger 

The  customers  ledger  is  an  underlying  ledger,  and  does 
not  vary  in  principle  from  the  ordinary  customers  or  credi- 
tors ledger.  Hence  it  does  not  require  further  comment. 
The  "Boston"  or  three-money-column  ledger  is  used.  (See 
Form  28.) 

General  Journal 

For  thepurposes  of  cotton  brokerage,  the  general  journal 
remains  unchanged  as  to  the  uses  to  which  it  is  put.  How- 
ever, as  seen  in  Form  29,  two  frequently  recurring  items 
will  be  found  therein.  One  is  "Cash  in  Sundry  Banks" 
charged  with  deposits,  wired  *by  other  banks  as  margin 
from  customers  out  of  town.  The  other  item  is  the  credit 
entry,  in  the  Customers'  Controlling,  account,  specifying 
which  individual  account  is  to  be  credited.  As  an  example, 
Frederick  Jones  of  Sumter,  South  Carolina,  deposits  for 
the  credit  -of  his  broker  in  New  York,  $500.  Upon  receipt 
of  the  bank  advice,  the  broker  debits  Cash  in  Sundry  Banks 
with  $500,  and  credits  the  Customers*  Controlling  account 
with  a  similar  amount. 

General  Ledger 

The  general  ledger  contains  all  real  and  economic  ac- 
counts, including,  of  course,  the  controlling  accounts  for 
customers'  and  Street  margins.  A  bound  book  better 
answers  the  purposes  of  this  ledger. 

Cash  Book 

The  cash  book,  as  shown  by  Forms  30a  and  30b,  has 
special  columns  conforming  to  the  needs  of  the  cotton 
brokerage  business.  On  the  cash  receipts  side  of  the  book 
are  found  columns  for  net  cash,  exchange  and  collection, 
contract  differences.  Street  margins,  interest  on  margins, 


V 


f 


THE    COTTON    FUTURES    MARKET 


139 


customers'  controlling  account,  and  a  general  ledger  Column. 
On  the  cash  disbursements  side  the  columnarization  pro- 
vides for  the  same  factors  with  the  exception  that  there  is 
no  column  for  exchange  and  collection  or  for  interest  on 
Street  margins.  In  addition,  there  are  general  and  sundry 
expenses  columns. 

Balancing  the  Cash  Book 

The  cash  book  is  balanced  monthly.  The  various 
columns  are  footed  and  posted  to  the  respective  ledger 
accounts  as  follows : 

On  the  cash  receipts  side,  the  total  appearing  in  the 
*  customers  column  is  posted  to  the  controlling  account  in 
the  general  ledger,  it  being  assumed  that  the  cash  payments 
by  customers  have  been  credited  daily  in  the  underlying 
ledger.  The  total  of  the  "Contract  Differences"  column 
represents  cash  received  through  the  clearing  house  as  settle- 
ments by  other  brokers,  and  hence  is  credited  to  the  Con- 
tract Differences  account."  The  "Street  Margins"  column 
is  posted  in  bulk  to  the  Street  margins  controlling  account 
in  the  general  ledger,  it  being  again  assumed  that  the 
respective  credits,  representing  released  margins,  have  been 
posted  to  the  underlying  Street  margin  ledger  (Form  31) 
in  the  regular  course  of  the  month.  "Interest  on  Margins" 
represents  an  earning,  since  that  interest  is  earned  on 
margins  which  were  released.  The  total  of  this  column  is 
posted  to  an  account  in  the  general  ledger  called  "Interest 
on  Margins."  The  accounts  appearing  in  the  "General 
Ledger"  column  have  already  been  posted,  making  further 
comment  unnecessary. 

The  disbursements  side  of  the  cash  book  is  treated  in  a 
similar  manner,  paying  due  regard  to  the  posting  of  the 
totals  in  the  respective  columns.  The  Cash  account  in 
the  general  ledger  is  charged  with  the  receipts  and  credited 


I 


I40 


COTTON    BROKERAGE 


!| 


it' 

it 


with  the  disbursements  for  the  month.  Finally,  the  balance 
appearing  in  the  cash  book  is  carried  down  and  the  opera- 
tions for  the  next  month  are  continued  as  before. 

The  difference  between  the  amount  paid  out  to  the  Clear- 
ing House  and  the  amount  received  therefrom,  as  shown 
by  the  "Contract  Differences"  column,  should  be  reconcilable 
to  the  net  sum  paid  or  received,  as  shown  by  the  brokers* 
statement  or  settlement  book  (see  Chapter  XX),  in  which 
recapitulation  of  payments  and  receipts  is  made  at  the  end 
of  each  month. 


I 


CHAPTER    XVIII 

CUSTOMERS^  RECORDS— THE  ACCOUNT  SALES 

REGISTER 

The  Contract  Differences  Account 

The  account  sales  register  or  analysis  journal  (Form 
37)  is  a  journal  in  both  form  and  principle.  It  records 
financial  facts,  reflecting  losses  or  gains  in  the  respective 
customers'  accounts.  When  the  customer  incurs  a  loss, 
the  broker,  who  is  acting  as  an  agent  for  his  principal, 
will  be  called  upon  to  settle  for  it  eventually.  At  this 
point  one  fact  is  certain — the  customer  must  be  charged 
with  the  loss  incurred  and  also  with  the  commission  on 
the  transaction  as  a  whole.  It  is  also  certain  that  an  ac- 
count payable  with  the  Street  has  been  created.  This 
liability  account  receives  the  technical  designation  of 
"Contract  Differences." 

If  a  gain  is  to  be  journalized,  the  customer  must  re- 
ceive credit  for  his  net  profit,  the  Commission  account 
also  receiving  credit  for  the  amount  due.  Also,  in  the 
case  of  a  profit,  an  account  receivable  is  created,  for  surely 
this  profit  difference  will  be  received  from  the  Street  either 
directly  or  indirectly;  at  least,  it  can  be  said  that  the  asset 
account  is  evident.  The  same  technical  designation,  "Con- 
tract Differences,"  is  given  to  the  asset  account.. 

The  Street  custom  has  possibly  adopted  a  wrong  prin- 
ciple in  accounting  in  merging  accounts  receivable  with 
accounts  payable,  reflecting  as  a  resultant  a  balance  figure 
which  is  sadly  in  need  of  analysis.  Examining  more 
deeply  into  this  matter,  however,  it  will  be  found  that  the 

141 


142 


COTTON    BROKERAGE 


} 


violation  is  less  to  be  condemned  when  we  consider  the 
system  under  which  the  Street  end  of  this  business  is  con- 
ducted. What  may  be  an  account  receivable,  considering 
the  option  months  separately  in  the  customers'  division, 
might  result  in  an  accounts  payable  to  the  Street.  The 
identity  of  the  customers  and  their  individual  profits  and 
losses  are  lost  in  the  Street  books. 

Factors  Affecting  the  Contract  Differences  Account 

Without  entering  into  the  question  of  settlement  be- 
tween brokers,  it  may  be  stated  here  that  two  factors  of 
settlement  in  the  Street  have  direct  bearing  upon  the 
Contract  Differences  account.  One  is  a  receipt  of  cash 
from  brokers  through  the  Clearing  House;  the  other,  pay- 
ments to  the  Clearing  House  for  the  accounts  of  brokers. 
The  former  indicates  that  the  broker  has  a  claim  on  the 
Clearing  House  by  reason  of  profits  in  the  process  of  col- 
lection. The  latter  carries  with  it  the  implication  that 
losses  of  the  customers  are  being  liquidated  through  the 
machinery  of  the  Clearing  House.  Also,  the  Contract 
Differences  account  is  charged  or  credited  with  the  re- 
spective profits  or  losses  incurred  or  realized  on  customers* 
transactions. 

Four  factors  then  enter  into  the  Contract  Differences 
account:  (1)  charges  as  offset  entries  to  customers'  profits; 
(2)  losses  of  customers  indicated  by  a  credit  to  the  Con- 
tract Differences  account;  (3)  receipts  from  brokers 
through  the  Clearing  House,  attesting  to  payment  on  ac- 
count of  customers'  profits;  (4)  payments  to  the  Street 
against  losses  on  customers'  contracts. 

The  purpose  of  conducting  a  set  of  Street  records  is 
to  make  possible  the  immediate  Hquidation  against  closed 
or  completed  contracts.  In  view  of  this,  no  case  could 
be  conceived  of  where  the  contracts  with  the  Street  would 


THE    ACCOUNT    SALES    REGISTER 


143 


be  settled  in  the  same  order  as  are  the  contracts  of  cus- 
tomers.   Take  as  illustrations  a  purchase  of  100  January 
at  12.10  for  the  account  of  John  Brown,  and  a  subsequent 
sale  at  12.40  for  the  same  account;  also  a  purchase  of 
100  March  at  12.00  and  a  subsequent  sale  at  11.96  for  the 
account  of  L.  Smith.    Assume,  for  convenience,  that  all 
these  transactions  were  made  with  Hamlin  &  Co.     In 
the  first  case,  the  Contract  Differences  account  would  be 
credited  with  $150,  representing  30  points  profit  on  the 
January  trade.     On  the  March  transactions  4  points,  or 
$20,   would  be  lost.      The  Contract   Differences  account 
would  show  a  debit  balance  of  $130,  being  composed  of 
an  account  receivable  and  an  account  payable.    The  opera- 
tions of  the  Street  books  contemplate,  at  best,  the  receipt 
of  $130,  regardless  of  the  broker  from  whom  receivable, 
or  of  the  customers  with  whom  profits  and  losses  are  set- 
tled.   This  emphasizes  the  statement  that  no  cognizance 
is  given  to  the  customers'  losses  or  gains  as  soon  as  the 
transactions  reach  the  point  of  entry  in  the  records  of  the 
Street. 

Arrangement  and  Operation  of  Account  Sales  Register 

The  account  sales  register  or  analysis  journal  is  entered 
from  an  account  sales  rendered  to  the  customer,  which  in 
turn  is  made  up  from  the  customers  contract  book. 

The  columnar  arrangement  of  this  journal,  as  shown 
by  Form  37,  is  as  follows :  the  account  sales  number ;  the 
date ;  customer's  name ;  folio ;  number  of  bales,  and  option 
months  covered  by  the  account  sale;  a  debit  and  a  credit 
column  for  entering  losses  or  gains  (always  including 
the  commissions)  of  the  customer;  a  debit  and  a  credit 
column  under  the  caption  ''Contract  Differences,"  where, 
in  the  case  of  a  debit  or  a  credit  to  the  customer,  a  cor- 
responding credit  or  debit,  less  the  commission,  will  be 


144  COTTON    BROKERAGE  * 

found.  Finally,  there  is  a  column  for  the  commission 
alone. 

The  following  illustrations  will  serve  to  show  the 
working  of  this  journal.  Taking  the  transactions  of  John 
Brown  who  purchased  100  January  at  13.08  and  sold  at 
13.20,  the  following  entry  would  appear: 

Debit  Contract   Differences $60.00 

Credit  John   Brown 40.00 

Credit  Commission 20.00 

Taking  the  case  of  a  loss  of  $60  by  John  Jones,  the 
entry  would  be: 

Debit  John  Jones $80.00 

Credit  Contract  Differences 60.00 

Credit  Commission 20.00      .     . 

If  a  customer  bought  100  January  at  13.04  and  sold  at 
13.08,  the  entry  would  be  expressed: 

Debit  Contract  Differences $20.00 

Credit  Commission 20.00 

In  this  case  no  entry  whatever  would  be  made  in  the 
customer's  columns,  as  the  trade,  so  far  as  he  is  concerned, 
reflects  an  even  settlement. 

Or  assuming  a  purchase  of  100  January  to  have  been 
made  at  13.05  and  to  have  been  sold  at  13.05  for  the  same 
customer,  the  entry  would  appear  as  follows: 

Debit  Customer $20.00 

Credit  Commission 20.00 

No  entry  would  be  made  in  the  "Contract  Differences" 
columns  for  the  reason  that  no  accounts  receivable  or 
payable  are  created  with  the  Street,  since  the  transaction 
from  the  Street  end  is  a  flat  or  even  settlement. 


' 


THE    ACCOUNT    SALES    REGISTER 


145 


The  contract  analysis  journal  is  of  the  type  of  a  special 
journal,  or  a  complex-type  book  of  original  entry.  Being 
columnarized,  it  presents  the  possibility  of  allowing  con- 
trolling accounts  in  the  general  ledger,  and  this  is  the 
case  in  actual  practice.  The  debit  and  credit  items  re- 
sulting from  either  losses  or  gains  of  the  customers,  are 
posted  daily  to  the  respective  customers'  accounts  in  the 
underlying  customers  ledger.  At  the  end  of  the  period, 
which  is  most  frequently  the  end  of  each  month,  a  re- 
capitulation of  the  debits  and  credits  is  made,  and  this 
summary  is  posted  to  the  respective  accounts  affected, 
including  the  posting  to  the  Customers'  Controlling 
account. 

To  illustrate  this  point,  let  it  be  assumed  that  the 
total  debits  in  the  customers  debit  column  is  $18,000; 
that  the  total  credits  in  the  customers  credit  column  is 
$25,000;  or  a  net  difference  between  the  two  columns  of 
$7,000  credit.  If  the  total  in  the  contract  differences 
debit  is  $26,000  and  the  total  of  the  credits  is  $18,000, 
or  a  net  difference  of  $8,000,  the  "Commission"  column 
must  total  up  to  a  credit  of  $1,000.  To  recapitulate,  there- 
fore, the  following  summary  would  appear: 


Debit 
Contract  Differences... 


$8,000.00 


$8,000.00 


Credit 

Customers  $7,000.00 

Commissions 1,000.00 


$8,000.00 


The  Contract  Differences  account  would  be  charged 
in  the  general  ledger  with  $8,000,  the  Customers'  Con- 
trolling account  credited  with  $7,000,  and  the  Commis- 
sion account  credited  with  $1,000. 

The  recapitulation  of  the  account  sales  register,  or 


146 


COTTON     BROKERAGE 


analysis  journal,  is  necessary  before  a  trial  balance  of  the 
general  ledger  can  be  taken. 

Customers'  Accounts  Payable 

In  the  ordinary  sense,  a  customer  is  looked  upon  as 
one  who  purchases,  and,  on  account  of  the  purchase,  is 
charged.    When  he  pays,  the  account  is  credited  and  bal- 
anced.     Vice  versa,  a  creditor  is  looked  upon  as  a  person 
from  whom  goods  are  purchased  or  who  has  yielded  any 
other  benefit.    But,  in  the  brokerage  business  something 
difTerent  arises.    The  customer  deposits  margin  for  which 
his  account  receives  credit.      As  no  other  offsetting  entry 
appears,  the  account  becomes  an  account  payable  or  cred- 
itor's account.     Any  losses  which  might  be  subsequently 
charged  to  the  account,  still  keep  it  as  a  creditor's  ac- 
count, for  only  infrequently  is  a  debit  balance  account 
allowed  to  remain  on  the  books.    Thus  an  invariable  rule 
is  dictated,  that  the  only  accounts  kept  with  customers 
or  clients  are  accounts  payable.    For  the  foregoing  reason, 
no  other  controlling  account  with  customers  would  be 
kept  than  accounts  payable.     A  practice  of  charging  all 
debit  accounts  to  profit  and  loss  prevents  the  possibility 
of  any  accounts  receivable  appearing  beyond  a  reasonable 
length  of  time.     In  auditing  accounts  this  rule  should  be 
remembered. 

Customers'  Statements 

Unlike  the  stock  business,  in  the  cotton  brokerage 
business,  no  interest  is  charged  or  allowed  on  customers' 
balances.  Each  customer  receives  a  monthly  statement 
of  his  account,  showing  the  profits  and  losses  arising  out 
of  his  transactions  during  the  month.  When  the  account 
in  the  customers  ledger  is  balanced,  a  statement  is  ren- 
dered to  the  customer,  similar  to  that  shown  in  Form  33. 


THE    ACCOUNT    SALES    REGISTER  j^^ 

Statement  of  Open  Trades 

Besides  receiving  a  statement  of  settled  transactions, 
each  customer  receives  a  statement  of  open  or  unliqui- 
dated trades,  similar  to  that  shown  in  Form  34.  This 
statement  is  made  out  in  duplicate,  thus  furnishing  a  basis 
for  the  compilation  of  the  'Toint  Balance,"  which  is  ex- 
plained in  Chapter  XXI. 

Account  Sales  Statement 

Form  35  shows  the  account  sales  statement  which  is 
sent  to  each  customer  as  soon  as  a  transaction  is  closed 
by  either  purchase  or  sale  against  open  commitments,  and 
gives  the  customer's  loss  or  gain.  It  will  be  observed  that 
the  transactions  are  not  carried  out  into  dollars,  but  that 
only  the  difference  in  points  is  considered.  The  gross 
profit  or  loss  is  the  same  as  the  amount  treated  in  the 
Contract  Differences  account  through  the  medium  of  the 
analysis  journal. 


CHAPTER    XIX 

THE    STREET    RECORDS 

Purchases  and  Sales  Book 

The  purchases  and  sales  book  (Form  25)  appears 
among  both  the  customers'  and  the  Street  records.  While 
its  most  important  feature  is  the  record  of  purchases  or 
sales  for  the  customer,  and  this  information  is  the  basis  of 
entry  for  the  customers'  records,  the  same  purchases  and 
sales  book  also  supplies  information  for  Street  purposes. 
In  the  Street  division  the  names  of  contracting  brokers 
and  the  number  of  bales  contracted  for  are  the  essentials; 
the  customers'  identity  is  wholly  lost. 

Cotton  Contract  Blotter 

The  "Street  Blotter,"  or  ''Cotton  Contract  Blotter" 
(Forms  36a  and  36b),  is  written  up  from  the  purchases 
and  sales  book.  Its  arrangement  is  such  that  each  current 
option  month  is  allotted  a  separate  section.  There  are 
commonly  found  eight  sections  providing  for  the  follow- 
ing options:  January,  March,  May,  July,  August,  Octo- 
ber, December,  and  sundry  months.  Each  ''contract" 
is  entered  separately  and  the  purchase  of  1,000  bales, 
whether  signed  up  or  contracted  with  one  or  ten  broker- 
age houses,  necessitates  ten  separate  entries. 

Unlike  the  blotter  used  in  the  stock  brokerage  business, 
the  book  as  used  here  is  not  a  financial  record.  Its  pur- 
pose is  to  gather  information  for  the  further  posting  of 
the  Street  ledger,  and  the  eventual  settlement  of  accounts 
among  the  brokers  concerned  in  any  given  transaction. 
The   "sign-up   slips"   or   forms   of   contract,   bearing  the 

148 


THE    STREET    RECORDS 


149 


names  of  the  contracting  parties,  are  used  for  the  purpose 
of  making  the  blotter  record  complete.  Thus,  the  ruling 
of  the  book  must  allow  for  the  following  information: 
the  number  of  bales  listed  in  single  hundreds;  the  con- 
tracting broker's  name;  the  price  at  which  purchased  or 
sold;  and  the  name  of  the  customer  so  purchasing  or 
selling. 

Street  Ledger 

Strange  to  say,  while  the  Street  ledger  (Form  32)  is 
a  book  of  secondary  or  summary  entry,  it  is  not,  strictly 
speaking,  a  financial  record.  While  it  shows  the  settle- 
ments on  various  contracts,  this  information  being  of  a 
financial  nature,  the  results  of  the  settlements  cannot  be 
classified  or  collated  for  either  trial  balance  purposes  or 
for  any  other  financial  information. 

The  Street  ledger  is  so  arranged  that  the  contracts 
are  classified  under  sections,  one  section  being  devoted 
to  each  contracting  broker.  Each  section  is  further  di- 
vided into  current  option  months,  one  page  being  allotted 
to  each  month.  The  brokerage  houses  are  alphabetically 
arranged  and  tabulated  so  that  each  individual  account 
stands  out  conspicuously.  If  occasion  arises  to  turn  to 
an  account,  it  can  be  done  with  the  least  amount  of 
effort,  and,  direct  from  that  section,  any  information  re- 
garding the  particular  account  is  readily  available. 

Arrangement  of  Street  Ledger 

Being  posted  from  the  blotter,  this  ledger  contains 
all  the  facts  relating  to  the  Street  end  of  transactions. 
Thus,  for  example,  the  account  of  B  &  Co.  on  the  page 
recording  January  options  (Form  32)  contains  the  follow- 
ing facts:  To  the  extreme  left  of  the  page  is  given  the 
actual  date  of  purchase.    As  each  contract  of  100  bales 


I50 


COTTON    BROKERAGE 


;** 


is  written  up  separately,  one  line  represents  one  contract, 
or  100  bales.     The  second  column  provides  for  the  price; 
while  the  third  column,  which  is  used  for  remarks,  is  not 
filled  in  until  later.    Following  this  is  a  double  rule  which 
separates  the  purchase  side  of  the  record  from  the  sales 
side.    This  second  division  of  the  ledger  contains  columns 
for  the  date  of  sale,  price,  and  remarks.      The  folio  shows 
the  purchases   of  customers   of  the   concern   keeping  the 
books,  and  not,  as  might  be  imagined,  purchases  for  the 
account  of  the  contracting  broker  whose  name  appears 
at  the  head  of  the  section.    To  illustrate  this  point,  any 
contracts  in  B  &  Co.'s  account  on  the  purchase  side  of 
A  &  Co.'s  Street  ledger,  would  mean  that  B  &  Co.  had 
sold  the  stated  number  of  bales  to  a  customer  of  A  &  Co., 
and  a  corresponding  construction  is  to  be  given  to  the 
sales  division  of  the  Street  ledger  folio. 

As  settlements  are  inevitable,  suitable  provision  must 
be  made  somewhere  in  the  arrangement  of  the  Street 
ledger  for  a  record  of  such  payments  or  receipts.    Hence, 
if  by  chance,  or  by  expiration  of  the  contract,  an  offset 
with  B  &  Co.  should  be  made,  it  would  result  either  in  a 
payment  to,  or  a  receipt  from  B  &  Co.     To  accomplish 
this  end,  the  Street  ledger  shown  in  Form  Z2  contains 
two  monetary  columns  to  the  extreme  right,  one  for  pay- 
ments to  B  &  Co.  which  would  be  reflected  in  the  debit 
column,  and  the  other  for  receipts  from  B  &  Co.  which 
would  find  expression  in  the  credit  column.     In  the  case 
of  a  credit  it  would  mean  that  money  had  been  received 
on  the  closed  trade  from  the  individual  broker;  in  the 
case  of  a  debit,  that  money  had  been  paid  to  him.     As 
an  example,  if  A  &  Co.  purchases  from  B  &  Co.  100  Jan- 
uary at  12.00,  and  the  settlement  or  sale  price  was  12.50,  it 
follows  that  B  &  Co.  would  owe  A  &  Co.  50  points  ot 
$250  (see  Form  Z2), 


THE    STREET    RECORDS 


151 


The  Street  Margin  Book 

The  fourth  book  of  the  Street  records  is  the  Street 
margin  ledger  (Forms  38a  and  38b).  The  name  of  this 
book  is  indicative  of  its  contents.  It  is  a  record  from 
which  the  condition  of  margins  between  brokers  can  be 
read.  In  principle  it  is  similar  to  the  customers'  margin 
system.  The  only  difference  which  exists  between  the 
two  is  to  be  found  in  the  purposes  for  which  such  memo- 
randa are  kept. 

The  by-laws  of  the  Cotton  Exchange  contain  certain 
regulations  relating  to  margins  between  brokers.  The 
reason  for  such  regulations  is  traceable  to  the  fact  that 
a  contractual  relationship  exists  between  the  brokers  con- 
cerned from  the  time  that  a  contract  for  futures  is  en- 
tered into  until  such  contract  is  terminated.  More  ex- 
plicitly, the  relation  of  the  broker  to  his  customer  is  ex- 
tended to  a  third  party — the  other  broker— thereby  im- 
posing the  same  duties  upon  the  brokers  involved  in  the 
transaction  as  devolve  upon  such  brokers  by  reason  of 
their  relation  to  their  customers. 

Unlike  the  stock  business,  a  contract  arising  out  of 
the  sale  or  purchase  of  cotton  is  not  consummated  upon 
the  next  business  day.  With  stock  transactions,  the  third 
party  broker  has  no  further  right  or  duties  beyond  the 
point  of  delivering  or  receiving  stock  against  payment. 
On  the  other  hand,  a  cotton  contract  might  be  made 
which  could  extend  over  a  period  of  almost  a  year.  For 
instance,  a  purchase  made  in  February  of  the  present  year, 
of  100  bales  of  next  year's  January  cotton,  might  be  car- 
ried along  until  December  31  of  the  present  year.  It  is 
obvious,  then,  that  a  very  wide  difference  in  price  might 
be  reflected  between  the  date  of  purchase  and  the  date 
upon  which  the  contract  is  finally  closed. 

To  illustrate,  let  it  be  assumed  that  the  customer  pur- 


152 


COTTON    BROKERAGE 


n 


chasing  the  100  bales  of  January,  holds  the  contract  up 
to  the  very  last  tender  day.  It  is  apparent  that  he  must 
keep  his  contract  well  margined.  The  same  demand  is 
made  of  the  brokers  in  order  that  the  open  contracts  be 
kept  at  market  prices  until  they  are  closed.  This  shows  the 
threefold  character  of  an  open  transaction. 

Ruling  and  Arrangement  of  the  Street  Margin  Book 

Forms  38a  and  38b  show  respectively  a  left-hand  and 
a  right-hand  page  of  a  typical  Street  margin  book.  Two 
facing  pages  are  allotted  to  each  broker  with  whom  con- 
tracts have  been  made.  The  left-hand  or  "long"  page  is 
divided  into  eight  main  sections,  each  headed  by  a  caption 
indicating  an  option  month.  All  purchases  made  from 
the  broker  whose  name  appears  at  the  head  of  the  page 
are  represented  on  this  left-hand  page.  The  respective 
month  columns  are  subdivided  to  show  the  date  of  pur- 
chase, number  of  bales,  and  the  cost  price.  At  the  top  of 
the  page,  space  is  left  for  ''Margin  up  by  them."  On 
the  right-hand  or  ''short"  page,  a  similar  ruling  is  to  be 
found.  The  captions  are  the  same  with  the  exception 
that  the  space  at  the  top  for  margin  information  is  headed 
"Margin  up  by  us." 

Relation  between  Margin  Book  and  Street  Ledger 

As  purchases  and  sales  are  made  from  day  to  day  in 
the  Street  ledger,  the  entries  are  duplicated  in  the  Street 
margin  book.  Thus,  all  facts,  save  those  which  are  ex- 
pressed in  the  monetary  columns  of  the  Street  ledger,  are 
transferred  to  the  margin  book.  If  a  contract  be  settled, 
a  line  is  drawn  through  that  particular  entry  in  the  Street 
margin  book.  At  all  times,  then,  if  comparison  be  made 
of  the  open  contracts  with  the  Street,  the  information 
which  is  furnished  by  the  Street  ledger  should  be  pos- 


THE    STREET    RECORDS 


153 


sible  of  reconciliation  with  its  companion  record — the 
Street  margin  ledger. 

As  an  illustration,  let  us  consider  the  following  trans- 
actions: On  February  5,  500  bales  of  March  were  sold  by 
broker  A  to  broker  B.  Without  regard  to  the  other 
Street  books,  the  record  of  sale  would  be  found  in  A's 
Street  ledger.  The  same  transaction  would  also  be  found 
in  A's  margin  book  on  the  right-hand  page  allotted  to 
B.  If,  by  a  subsequent  purchase  of  300  March,  a  direct 
settlement  with  B  were  effected,  the  Street  ledger  would 
attest  to  the  settlement  by  showing  only  200  March  open. 
Simultaneously,  B's  account  in  A's  margin  book  would 
be  made  to  show  the  same  number  of  contracts  open. 
Needless  to  say,  the  price  of  such  open  contracts  as  shown 
by  these  two  records  would  be  similar. 

Margin  Call  and  Release 

It  is  imperative  that  a  constant  review  of  the  contents 
of  the  Street  margin  book  be  made  with  the  purpose  of 
either  calling  on  brokers  for  market  margin  due,  or  of 
releasing  such  margin  deposits  as  are  free  and  clear.  To 
illustrate  the  operation  of  the  margin  call,  suppose  that, 
on  February  15,  broker  A  purchased  for  the  account  of 
his  customer  from  broker  B,  100  January  at  12.90.  On 
March  6  the  market  price  rose  to  14.00.  In  that  case  B 
would  owe  A  the  difference  of  110  points,  or  $550.  Fur- 
chasing  broker  A  would  then  send  a  "market  margin  call" 
(Form  39)  to  B,  who  upon  receipt  thereof  would  respond 
(Form  40)  by  depositing  with  the  Superintendent  of  the 
New  York  Cotton  Exchange  an  amount  of  money  sufficient 
to  bring  the  contract  with  A  up  to  the  new  market  price. 
Conversely,  if  the  price  should  operate  against  the  pur- 
chaser and  fall  below  12.90,  then  B  would  have  the  right 
to  demand  market  margin  from  A. 


•  • 


! 


154 


COTTON    BROKERAGE 


When  margin  has  been  deposited  and  the  changing 
market  price  nears  a  point  where  the  difference  between 
the  contract  price  and  the  market  price  is  very  small,  or 
where  the  two  prices  approximate  each  other,  the  party 
who  deposited  the  margin  is  entitled  to  its  release.  Thus 
in  the  foregoing  example,  if  after  B  deposits  margin  in 
response  to  A'?  call,  the  price  of  January  again  drops  to 
12.90,  B's  contracts  at  this  price  reflect  no  market  loss. 
Hence,  the  margin  which  he  put  up,  which  is  on  deposit 
with  a  trust  company,  is  releasable.  Upon  demand,  broker 
A  then  indorses  the  margin  certificate  held  by  B,  who 
thus  obtains  a  release  of  his  money. 

The  margin  certificate  referred  to  is  an  instrument 
issued  by  virtue  of  the  Exchange,  as  evidence  that  money 
has  been  deposited  in  response  to  a  margin  call.  The 
certificate  may  be  made  payable  to  either  broker,  as  the 
Superintendent  of  the  Exchange  may  direct.  In  the  fore- 
going illustration,  the  certificate  would  be  issued  to  B 
when  he  deposits  margin  in  response  to  A's  call.  If 
thereafter  the  market  price  for  January  goes  back  to 
12.90,  B  no  longer  owes  A  any  money  on  open  contracts, 
and  he  is  required  to  release  by  indorsement  of  the  margin 
certificate  B's  funds  tied  up  in  margins.  The  Superin- 
tendent of  the  Exchange  also  attests  to  this  release  by 
indorsing  his  name  on  the  back  of  the  certificate.  (See 
Form  41b.)  Thus  the  margin  certificate  becomes  a  ne- 
gotiable instrument,  which  may  be  deposited  by  B  for  its 
face  value. 

Interest  on  Margins 

Another  phase  of  the  system  of  margin  deposits  is  the 
interest  allowed  by  the  trust  company  with  which  the 
funds  are  deposited.  In  drawing  his  check,  B  makes  it 
payable  to  some  bank  designated  by  the  Cotton  Exchange 


THE    STREET    RECORDS 


155 


as  a  depository  for  margins.  This  check  is  certified,  and 
to  it  is  attached  a  notice  to  A  (Form  40),  stating  that  in 
response  to  the  margin  call  a  stated  sum  has  been  de- 
posited by  B  in  some  specified  bank  or  trust  company. 
When  the  Superintendent  of  the  Exchange  receives  both 
the  check  and  the  notice,  he  stamps  *Taid"  on  the  face 
of  the  latter  and  causes  it  to  be  delivered  to  A,  as  his 
notice  of  B's  response  and  deposit.  Interest  on  margins 
at  the  rate  of  2%  to  3  1/2%  is  allowed  by  the  bank  or 
trust  company,  so  that  if  a  margin  of  $2,000  were  released 
after  35  days'  time,  the  interest  would,  assuming  the  in- 
terest rate  to  have  been  3%,  amount  to  $5.84;  and  this 
interest  would  be  paid  with  the  principal. 

Original  Margins 

A  word  may  be  added  here  in  reference  to  another 
form  of  margin.  Brokers  doing  a  customers'  commission 
business  may  be  divided  into  two  classes.  The  first  em- 
braces the  strong  financial  houses;  the  second  the  medium 
and  weaker  houses.  In  no  other  line,  perhaps,  does  credit 
play  such  an  important  part  in  the  relationship  between 
contracting  parties. 

The  Exchange  has  designated  certain  rules  and  regu- 
lations in  regard  to  market  margins,  as  already  explained. 
The  by-laws  of  the  Exchange  also  provide  for  what  are 
called  ''Original  Margins."  A  broker,  who  has  reason  to 
believe  that  a  party  with  whom  he  has  contracted  belongs 
to  the  second  class,  may  send  a  margin  call  demanding 
an  original  margin  of  $200  to  $500  for  each  contract. 
These  originals  are  also  frequently  demanded  from  the 
larger  houses  with  whom  many  contracts  have  been  made. 
In  any  event,  all  calls  for  original  margin  must  be  made 
within  24  hours  after  the  contract  has  been  entered  into. 
The  broker  "called"  for  margin  of  $5  a  bale  or  $500  on  a 


156 


COTTON    BROKERAGE 


I 


contract,  must  deposit  that  sum  with  the  Superintendent 
of  the  Exchange;  and  this  should  be  done  as  soon  as  the 
call  is  received. 

Time  for  Deposit  of  Market  Margins 

All  calls  received  before  10:30  a.m.  on  days  excepting 
Saturday  must  be  deposited  before  11 :30  o'clock  of  the  same 
day.  Calls  which  are  received  after  10 :30  a.m.,  and  before 
12  o'clock,  must  be  deposited  before  2  p.m.  of  the  same  day. 
Calls  coming  in  after  12  o'clock  must  be  deposited  before 
11:30  A.M.  the  next  business  day — Saturday  excepted. 
Calls  received  after  12  o'clock  on  Friday  must  be  de- 
posited before  11  a.m.  on  Saturday.  Calls  received  on 
Saturday  before  10:30  must  be  deposited  before  11  a.m.; 
those  received  after  10:30  must  be  deposited  before  11:30 
A.M.  the  following  Monday. 


CHAPTER    XX 

SETTLEMENTS   BETWEEN   BROKERS 

Conditions  Affecting  Settlements 

In  all  futures  business,  contracts  may  be  sold  short  and 
eventually  covered,  or  they  may  be  sold  for  actual  delivery. 
In  the  latter  case  the  producer  might  ship  his  cotton  to  New 
York  for  delivery  against  his  sale.  On  the  other  hand, 
cotton  may  be  purchased  with  the  purpose  of  making  profit 
on  an  advancing  market,  or  it  may  be  purchased  with  the 
actual  intention  of  receiving  the  commodity.  Such  a  state 
of  affairs  permits  of  short  selling  or  long  buying.  This  con- 
dition might  be  further  reflected  by  a  sale  being  posted  in  the 
contract  ledger  with  no  offset  on  the  purchase  side.  A  simi- 
lar condition  arises  again  in  the  case  of  "long"  cotton  being 
sold  to  a  broker  with  whom  no  "long"  contracts  were  held. 

As  an  example,  suppose  A  &  Co.  buy  100  bales  of 
January  from  B  &  Co.  for  the  account  of  Jones.  When 
Jones  gives  his  selling  order,  100  bales  of  January  might  be 
sold  to  C  &  Co.     This  illustrates  two  points : 

First,  that  open  contracts  can  exist  with  the  Street 
brokers  without  having  a  corresponding  interest  in  the 
market  for  the  account  of  customers,  though  the  net  interest, 
or  the  result  after  considering  all  the  contracts,  must,  of 
course,  be  similar  to  the  result  obtained  after  treating  the 
customers'  holdings.  In  the  case  cited,  A  &  Co.  had  no 
interest  in  the  market  for  the  account  of  the  customer ;  yet 
the  Street  ledger  reflects  a  condition  totally  different  from 
the  one  mentioned.  But  if  the  net  difference  of  the  con- 
tracts, long  and  short,  were  taken  into  account,  the  Street 
ledger  would  also  reflect  such  interest  in  the  market. 

157 


158 


COTTON    BROKERAGE 


SETTLEMENTS    BETWEEN    BROKERS 


1 
I 


Second,  that  the  Street  books  are  kept  in  total  disregard 
of  the  customers'  division ;  that  is,  so  far  as  the  memorandum 
facts  are  concerned.  A  reconciliation  with  the  customers' 
books  is  not  even  attempted,  and  under  the  system  employed 
It  could  not  be  successfully  made.  Only  after  careful 
compilation  and  an  understanding  of  the  construction  of  the 
accounts,  can  proof  be  had  attesting  the  correctness  of  the 
Street  books. 

From  this  it  may  be  seen  that  settlements  with  the  indi- 
vidual brokers  cannot  be  expected  at  the  same  time  that 
settlements  with  customers  are  made. 

Methods  of  Settlement 

Generally  speaking,  there  are  four  methods  employed  for 
setthng  outstanding  Street  contracts  between  brokers. 
These  are : 


1. 
2. 
3. 
4. 


Direct  settlement 
Ringing  method 
Street  let-out 
Tender  of  notice 


I.  Direct  Settlement 

The  method  of  settling  contracts  between  brokers  by  way 
of  direct  payment  or  an  oflFset  by  either  purchase  or  sale  is 
so  obvious  as  to  require  no  discussion.  But,  suppose  that  a 
broker  purchases  options  from  sundry  brokers,  and  sells 
them  at  some  subsequent  time.  In  order  to  liquidate  the 
outstanding  Street  contracts,  one  of  the  three  methods,  other 
than  direct  settlement,  may  then  be  employed. 

2.  Ringing  Method 

The  first  indirect  method  of  settling  contracts  in  the 
Street  is  by  "ringing."  By  this  is  meant  the  matching  of 
names  of  buyers  against  sellers  of  the  same  options,  with 


159 


the  purpose  of  literally  "getting  out"  of  the  contract  and 
thus  eflfecting  a  settlement.  The  term  "pair-off"  aptly  de- 
scribes the  ringing  method— a  system  of  settlement  encour- 
aged by  the  authorities  on  the  Exchange,  for  it  greatly 
relieves  the  burden  on  the  last  day  of  tender,  or,  as  it  is 
commonly  called,  "Notice  Day"  or  "Transfer  Day." 

To  illustrate  the  ringing  method  of  settlement,  assume 
that  broker  A  sold  to'  broker  B  500  bales  of  May,  and  pur- 
chased from  broker  C  the  same  quantity  (price  does  not 
enter  into  the  ringing  method  nor  into  any  other  indirect 
method  of  settlement  among  brokers).  If  B  should  sell  to 
C  500  bales  of  May,  A  could  "ring"  these  contracts  and  the 
result  would  be  a  transfer  to  C  of  A's  contracts  with  B.  B 
could  also  settle  his  contracts  with  A  and  C,  and  C.  could 
settle  with  B  and  A,  and  in  this  manner  an  offset  could  be 
had  and  a  settlement  of  all  the  transactions  effected. 

To  make  this  clear,  let  the  Street  ledgers  of  A,  B,  and  C 
be  taken,  in  which  appear  these  hypothetical  purchases  and 
sales. 

A.  Street  ledger  shows  a  sale  to  B  of  500  May,  and  a 
purchase  of  500  May  from  C. 

B.  Street  ledger  reflects  a  purchase  from  A  of  500  May, 
and  a  sale  to  C  of  500  May. 

C.  Street  ledger  reflects  a  purchase  from  B  of  500  May, 
and  a  sale  to  A  of  the  same  quantity. 

Hence  the  following  offsets  would  be  made  in  the  three 
books : 

A,  in  offsetting  the  account  of  B,  would  do  so  by  entering 
500  May  on  the  left-hand  side  of  the  folio,  and  placing  the 
name  of  C  in  the  "Remarks"  column.  This  will  constitute 
a  cross-reference  to  C,  whose  account  in  A's  books  will  be 
offset  by  an  entry  on  the  credit  side  with  B's  name  appearing 
in  the  "Remarks"  column. 

On  B's  books  the  names  of  C  and  A  will  appear  respec- 


!i 


i6o 


COTTON    BROKERAGE 


lively  as  offsets  against  the  purchases  and  sales  made  with 
C  and  A.  Thus  the  same  result  will  be  accomplished  as  on 
C's  books. 

On  C's  books  the  names  of  A  and  B  will  establish  a 
cross-reference  and  set-off  against  the  contracts  bought  and 
sold. 

10:30  A.M.  Bids 

At  10:30  each  morning  prices  known  as  the  "10:30 
Bids''  appear  on  the  cotton  ticker.  These  bids  are  used  as 
an  arbitrary  settlement  price  on  "rings."  I'aking  the  fore- 
going hypothetical  transactions  between  A,  B,  and  C,  it  can 
be  readily  seen  that  in  the  offsets  one  factor  is  missing— the 
price  of  settlement. 

Assume  that  A's  500  May  were  sold  to  B  at  12.60  and 
purchased  from  C  at  12.40.  In  the  offset  columns  in  the 
accounts  of  B  and  C,  there  will  now  appear  500  May  at 
12.10,  and  in  the  "Remarks"  column  the  letter  "R,"  indi- 
cating that  this  price  is  the  ring  or  settlement  price  oi  that 
particular  option  on  that  day.  Disregarding  for  the  moment 
the  principle  involved  in  these  transactions,  A  will  receive 
$500  in  settlement  of  the  difference  between  12.40  as  the 
purchase  price  and  12.60  as  the  sale  price,  on  500  May 
cotton.  Employing  now  the  10:30  bid  price  of  12.10,  the 
amount  received  by  A  should  be  the  same. 

In  proving  this  statement,  it  will  be  found  that  $1,250 
was  received  from  B  in  settlement,  and  that  a  payment  of 
$750  was  made  to  C,  or  a  net  difference  received  by  A  of 
$500.  This  is  derived  in  the  following  manner :  It  will  be 
remembered  that  the  contract  was  sold  to  B  at  12.60  and 
offset  at  12.10.  This  results  in  a  difference  in  A's  favor  of 
50  points  on  100  bales,  or  250  points  on  500  bales.  Resolved 
into  terms  of  money,  this  is  $1,250.     It  will  also  be  recalled 


I 


SETTLEMENTS    BETWEEN    BROKERS 


161 


that  A  purchased  from  C  500  May  at  12.40.  Using  the 
same  settlement  price  of  12.10,  a  difference  of  150  points 
exists  in  C's  favor  which,  in  terms  of  money,  contemplates  a 
payment  to  C  of  $750,  leaving  a  balance  of  $500  to  A's 
credit. 

Ring  Clerks  and  the  Clearing  House 

A  word  of  explanation  may  be  given  here  as  to  how  the 
ringing  method  is  carried  out  in  practice.  The  New  York 
Cotton  Exchange  has  established  a  clearing  house  of  its  own, 
where  the  ring  clerks  of  the  various  cotton  brokerage  houses 
assemble  each  morning.  Each  clerk  has  in  his  possession  a 
slate  book  containing  the  names  of  purchasing  and  selling 
brokers,  and  the  number  and  classification  of  options  which 
each  broker  has  open  on  the  Street  ledger.  A's  clerk  makes 
it  his  business  to  see  B's  clerk,  or  vice  versa.  An  exchange 
of  names  then  goes  on  until  A  calls  the  name  of  C.  Imme- 
diately the  possibility  of  ringing  the  500  May  presents  itself. 
The  ring  is  called  off  by  the  party  making  it.  Thus,  if  A 
makes  a  ring  with  C,  the  names  in  the  ring  run  as  follows : 
A  sold  to  B,  B  sold  to  C,  C  sold  to  A ;  A  being  the  first  and 
the  last  name.  The  same  course  is  gone  through  by  the  ring 
clerks  until  as  many  rings  have  been  made  as  are  possible. 
Rings  made  on  one  day  are  settled  the  next  business  day, 
together  with  any  direct  settlements  which  may  have  been 
made  between  brokers. 

3.  Street  Let-out 

Very  often  ringing  becomes  difficult  by  reason  of  the 
inability  to  get  buyer  and  seller  to  pair  off  their  contracts. 
Thus,  A  who  sells  to  B  and  buys  from  C,  cannot  set  off  B's 
name  against  C,  owing  to  the  fact  that  B  and  C  have  no 
immediate  relationship  between  themselves.  Only  when 
B  and  C  have  such  a  relationship  is  ringing  possible.     Such 


t62 


COTTON    BROKERAGE 


a  condition  is  met  by  the  third  method  of  settlement  known 
as  the  "Street  Let-out." 

This  system  contemplates  the  giving  up  of  names  on 
either  purchase  or  sale,  upon  the  request  of  the  broker  seek- 
ing the  "let-out."  The  following  case  will  illustrate  the 
method:  A  sells  to  B  1,000  January  and  purchases  from  C 
the  same  quantity  of  contracts.  A  is  unable  to  ring  with 
either  B  or  C,  because  they  do  not  trade  with  each  other. 
In  order,  therefore,  to  effect  a  set-off  in  B's  account,  A  must 
secure  1,000  January  en  the  opposite  side  of  the  Street 
ledger.  B  does  not  sell  to  any  broker  from  whom  A  buys. 
But  if  B  should  sell  1,000  January  at  any  time,  the  names 
of  the  brokers  purchasing  from  B  are  given  to  A  in  substitu- 
tion for  B's  name.  This  would  have  the  effect  of  an  offset 
in  B's  account,  and  would  further  place  upon  the  books  of 
A  the  names  of  brokers  which  B  substituted  for  his  own. 

The  settlement  price  used  in  this  case  is  the  price 
obtained  by  B  on  his  sale  of  the  January  contracts.  In  other 
words,  what  B  really  does  is  this :  He  exchanges  the  names 
of  the  purchasers  in  that  transaction  for  the  name  of  A.  In 
this  way  the  original  purchase  by  B  from  A  would  be  offset 
by  this  later  sale  by  B.  For  example,  B  in  this  sale  sells  to 
four  other  brokers,  D,  E,  F,  and  G.  B  then  notifies  D,  E, 
F,  and  G  that  he  "gives  up"  A  in  the  transaction,  thereby 
effecting  a  change  in  the  name  of  the  principal.  A  then 
offsets  the  contracts  in  B's  account  with  the  names  and  prices 
given  by  B.  Where  formerly  there  was  one  single  name 
with  which  to  ring,  in  this  case  there  are  four.  An  abun- 
dance of  names  is  conducive  towards  easier  ringing. 

To  further  explain  the  settlement  price  used  in  this  trans- 
action, the  following  illustration  will  serve:  A  sells  the 
original  contracts  to  B  at  12.60.  This  will  appear  in  the 
Street  ledger  on  the  right-hand  side  of  B's  account.  If  B 
should  then  sell  1,000  January  at  12.40  and  in  effect  give  up, 


SETTLEMENTS    BETWEEN    BROKERS 


163 


or  eliminate  himself  as  the  principal  in  the  transaction,  the 
name  of  A  would  appear  as  the  seller.  A  would  then  open 
accounts  for  D,  E,  F,  and  G,  stating  the  account,  the  date  of 
let-out,  the  number  of  bales,  and  the  price,  with  the  addi- 
tional information  in  the  "Remarks"  column  that  the  entries 
appear  by  reason  of  a  let-out.  B  accepts  A's  name  in  lieu  of 
the  names  of  D,  E,  F,  and  G.  The  account  of  B  therefore 
will  contain  an  entry  on  the  left-hand  side  of  the  folio  re- 
flecting the  offset  by  1,000  January  at  12.40,  with  cross- 
reference  in  the  "Remarks"  column  alluding  to  the  accounts 
of  D,  E,  F,  and  G.  A  would  then  "bill"  B  for  20  points  on 
1,000  bales,  or  $1,000. 

Thus,  by  the  let-out  system,  A  can  substitute  the  names 
of  D,  E,  F,  and  G,  for  B's  name.  He  then  substitutes  the 
sale  price  of  12.60  for  12.40,  and  collects  the  difference 
from  B. 

This  entry  can  be  traced  to  the  Street  blotter  (see  Forms 
42a  and  42b)  but  does  not  go  beyond  that  record.  The 
purchases  and  sales  book  is  not  concerned  in  this  transfer, 
and  furthermore,  as  the  offset  on  either  side  of  the  Street 
ledger  was  made  at  12.40,  the  eventual  financial  result  would 
not  be  altered. 

4.  Tender  of  Notice 

The  fourth  and  last  means  of  settlement  is  the  transfer- 
able notice  or  tender  of  delivery.  It  is  the  simplest  method 
in  operation,  resembling  very  much  the  principle  behind  the 
ringing  system. 

At  the  expiration  of  the  current  option  month,  the  pur- 
chasing broker  of  a  contract — 100  bales— receives  a  notice 
from  the  broker  issuing  the  same,  stating  that  the  latter 
is  prepared  to  deliver  50,000  pounds  of  cotton  at  a  price 
stated  in  the  notice. 

If  A  sold  to  B  and  bought  from  C,  the  latter  might  issue 


164 


COTTON    BROKERAGE 


or  transfer  this  notice  to  A,  who  in  turn  would  transfer  it 
to  B.  A  relationship  is  then  created  between  A,  B,  and  C, 
which  resolves  itself  into  a  ring.  Thus,  A  tenders  to  B,  and 
C  tenders  to  A;  or,  leaving  A  out  of  the  transaction,  C 
tenders  to  B  on  account  of  A. 

The  same  method  of  offset  is  used  here  as  in  the  pre- 
ceding method  of  settlement,  except  that  in  the  "Remarks" 
column  appears  the  information  that  the  contract  was  ten- 
dered, and  cross-reference  is  made  to  the  transferee  and 
transferor. 

The  settlement  price  will,  of  course,  be  the  price  men- 
tioned in  the  'Transferable  Notice,"  and  is  treated  in  the 
same  manner  as  the  10 :30  bids,  or  the  ring  prices. 

Clearing  House  Payments  on  Settlements 

In  the  foregoing  discussion  mention  has  been  made  of 
payments  and  receipts  between  the  various  brokers  on  the 
Exchange.  To  facilitate  such  settlement,  the  New  York 
Cotton  Kxchange  has  established  a  clearing  house  in  charge 
of  which  is  a  representative  from  a  prominent  New  York 
bank. 

Each  morning  a  clearing  house  sheet  is  filed  by  the  mem- 
bers availing  themselves  of  the  clearing  house  privilege. 
(See  Form  43. )  It  contains  a  list  of  the  brokers  from  whom 
balances  are  claimed  or  to  whom  balances  are  owed.  The 
net  difference  between  the  two  sides  will  result  in  either  a 
payment  to,  or  draft  on,  the  Clearing  House. 

The  accuracy  of  this  system  is  aided  by  the  established 
custom  among  brokers  of  depositing  with  the  clearing  house 
clerk  the  bills  (Form  44)  arising  out  of  any  of  the  four 
methods  of  settlement  already  described.  Only  such  items 
as  are  stated  on  the  bills  are  entered  on  this  clearing  house 
sheet.  Thus  the  clerk  of  each  brokerage  house  is  in  a  posi- 
tion to  check  the  accuracy  of  the  bill  which  he  receives.    If 


SETTLEMENTS    BETWEEN    BROKERS  165 

nothing  be  said  to  the  contrary,  the  bill  is  presumed  to  be 
correct  and  the  item  is  listed  on  the  sheet. 

The  Clearing  House  receives  as  much  money  as  it  pays 
out  against  clearing  house  drafts.  Only  money  balances  are 
listed,  no  attention  whatsoever  being  paid  to  the  source  of 
issuance.  In  effect,  the  Cotton  Clearing  House  resembles 
the  Bank  Clearing  House  more  than  does  the  Stock 
Clearing  House. 

Brokers'  Statement  or  Settlement  Book 

The  clearing  house  settlements  discussed  above  are 
entered  in  a  "Brokers'  Statement"  or  "Settlement  Book," 
shown  in  Forms  45a  and  45b.  The  first  of  these  presents 
the  payment  side  of  the  book,  corresponding  to  the  "We 
Owe  to"  shown  in  the  clearing  house  sheet  (Form  43). 
The  second  shows  the  collection  side,  which  corresponds  to 
the  "We  Claim  from"  column  of  the  clearing  house  sheet. 

The  purpose  of  the  settlement  book  is  to  record  the 
receipts  and  payments  on  settlements,  stating  the  name  of 
the  broker  from  whom  settlement  is  received  or  with  whom 
settlement  is  made.  Besides  this  information  it  gives  the 
source  of  receipt  or  payment  by  reflecting  in  special  columns 
the  respective  months  on  which  payment  is  made  or  settle- 
ment received.  It  is  the  basis  for  making  up  the  clearing 
house  sheet. 

The  date  appears  at  the  top  of  the  page,  and  on  the  debit 
or  payment  side  are  columns  for  the  name  of  the  broker ;  the 
number  of  bales  settled  with  each  broker ;  eight  special  mone- 
tary columns  for  the  respective  option  months  on  which 
payment  is  made ;  and  a  "Total  Amount"  column.  In  this 
last  column  appears  the  cross-footing  of  all  the  other 
coltunns. 

The  same  arrangement  obtains  on  the  credit  or  collection 
side.     The  difference  between  the  two  "Total  Amount" 


i66 


COTTON    BROKERAGE 


columns  will  result  in  either  a  cash  receipt  from,  or  a  cash 
payment  to,  the  Clearing  House.  This  difference  should  be 
identical  with  that  appearing  on  the  clearing  house  sheet. 


I 


CHAPTER    XXI 

CONTRACT   DIFFERENCES    AND   THE   POINT 

BALANCE 

Requirements  as  to  Records 

The  records  of  the  cotton  brokerage  business  must  be 
kept  up  to  the  mark.  This  is  even  more  necessary  here 
than  in  the  stock  business,  for  the  day's  operations  depend 
absolutely  upon  the  information  furnished  by  the  various 
accounting  media.  If  customer  X  desires  to  sell  his  longs 
or  cover  his  shorts,  recourse  must  be  had  to  X's  account  in 
either  the  customers  contract  book  or  the  customers  margin 
sheets.  In  the  course  of  a  day's  transactions,  several  tele- 
grams from  out-of-town  clients  are  received,  in  which  orders 
are  given  to  close  out  longs  or  cover  shorts,  not  stating  in 
what  options  such  customers  are  interested.  This  illustrates 
how  essential  it  is  to  have  the  accounts  completely  written 
up.  To  exercise  a  double  check  upon  the  accuracy  of  cus- 
tomers' holdings,  it  becomes  necessary  for  the  margin  clerk 
and  the  bookkeeper  to  compare  open  contracts  of  clients  very 
frequently. 

At  any  given  time,  also,  it  should  be  possible  for  the 
Street  clerk  to  prove  the  net  interest,  long  or  short,  taken 
from  his  Street  books,  with  the  net  number  of  bales  long  and 
short  as  they  appear  in  the  customers'  records.  Qassifying 
the  various  contracts  into  months,  the  net  interest  in  each 
option  can  also  be  determined,  upon  the  theory  that  the  same 
purchases  and  sales,  leading  up  to  the  determination  of  the 
net  long  and  short,  are  passed  through  both  divisions cus- 
tomers' and  Street.      As  was  indicated,  the  Street  section 

167 


i68 


COTTON    BROKERAGE 


concerns  itself  with  the  settlement  with  brokers,  always 
having  as  an  objective  the  reduction  of  all  closed  contracts 
to  a  condition  where  the  net  interest  in  the  market  approxi- 
mates the  customers*  net  interest. 

It  is  easily  seen,  therefore,  that  there  may  be  a  wide 
divergence  between  the  books  of  the  two  divisions.    Suppose 
X,  Y,  and  Z  purchase  in  the  aggregate  5,000  bales  of  various 
options,  and  that  customers  M  and  N  sell  3,000  bales  of 
different  months.     The  net  interest  which  the  broker  has  in 
the  market  for  the  account  of  his  customers  is  2,000  bales, 
net  long.     Even  if  we  suppose  that  all  the  contracts  traded 
m  have  been  in  the  January  option,  no  '*close  out''  or  settle- 
ment by  account  sales  can  be  made  with  the  customers, 
because  the  purchases  and  sales  have  been  made  for  several 
different  accounts.     Only  where  a  client  buys  and  sells  the 
same  option  month,  can  an  account  sales  be  rendered  to  him. 
The  status  of  the  accounts,  individually  taken,  would  be  such 
that  long  contracts  would  be  shown  for  some  customers, 
while  short  contracts  of  the  same  option  months  would  be 
revealed  for  other  accounts. 

The  Street  division  takes  no  cognizance  of  such  a  condi- 
tion existing  among  customers.  As  before  stated,  its  pur- 
pose is  to  settle  contracts  of  the  same  month  regardless  of 
other  conditions.  If  a  direct  settlement,  a  ring,  or  Street 
let-out  be  possible,  it  can  be  said  with  certainty  that  the  3,000 
January  bought  and  sold  in  the  foregoing  illustration,  would 
be  settled  before— and  probably  long  before— the  respective 
customers  liquidated  their  holdings. 

Contract  Differences  Account 

This  brings  us  again  to  the  subject  of  "Contract  Dif- 
ferences." If  one  division  of  the  broker's  office  works  in 
total  disregard  of  the  apparently  logical  succession  of  opera- 
tions  involved  in  the  settlement  of  contracts,  then  the  results 


/ 


I 


CONTRACT  DIFFERENCES-POINT   BALANCE       169 

obtained  from  the  Street  books  will  be  in  apparent  contra- 
diction  to  those  obtained  from  the  customers'  records.  This 
fact  was  emphasized  in  the  preceding  illustration  of  3,000 
January  upon  which  payment  was  either  made  or  received 
long  in  advance  of  any  charges  or  credits  being  made  in 
customers'  accounts. 

A  thorough  understanding  of  the  theory  upon  which  the 
Contract  Differences  account  operates  makes  necessary  the 
division  of  the  subject  under  two  headings : 

1.  Treatment  of  the  customers'  transactions  as  open 

contracts  and  liquidated  contracts. 

2.  Treatment  of  the  same  transactions  with  brokers 

in  the  Street  as  contracts  open  and  contracts 
settled. 

Transactions  which  are  settled  for  customers,  represent- 
ing purchase  and  sale,  create  either  a  debit  or  a  credit  to 
Contract  Differences  as  explained  in  Chapter  XVIII.  A 
debit  to  that  account  signifies  that  the  Street  owes  a  sum 
which  would  equal  the  gross  profit  of  the  customer  on  a 
given  transaction.  A  credit  to  the  account  under  discussion 
evidences  the  liability  of  the  broker  to  the  Street  on  account 
of  his  customers'  losses.  Excluding  all  other  factors  at 
this  point,  the  difference— the  Contract  Differences  account 
— reflects  a  sum  owing  to  or  by  the  Street.  Of  course,  this 
case  presupposes  that  all  customers'  holdings,  long  and  short, 
have  been  closed.  If  such  be  the  case,  then  the  immediate 
relation  between  the  customers'  books  and  the  Street  books 
is  not  so  greatly  strained. 

But  this,  however,  is  seldom  the  case.  The  broker  is  an 
agent.  As  such  he  is  called  upon  to  settle  with  the  Street 
on  account  of  his  customers'  losses,  and  collect  from  it  by 
reason  of  his  clients'  profits,  and  unless  the  Street  division  is 
able  to  settle  the  contracts  in  question  with  equal  rapidity. 


^ 


\ 


I 


II 


I- 


170 


COTTON    BROKERAGE 


or  vice  versa,  the  results  shown  by  the  customers'  books  and 
the  Street  books  may  be  widely  different. 

In  the  case  of  a  loss,  the  Contract  Differences  account 
shows  the  corresponding  liability  to  the  other  Street  brokers. 
For  instance,  if  the  total  loss  be  $800,  a  payment  of  cash  to 
the  Street  will  offset  the  Contract  Differences  account  by  a 
debit  to  it  and  a  credit  to  cash.  This  simple  operation,  hypo- 
thetical as  it  may  be,  illustrates  one  phase  of  the  Contract 
Differences  account. 

As  soon  as  the  element  of  practice  enters  the  discussion, 
the  Contract  Differences  account  assumes  a  very  different 
aspect.  For  instance,  the  contracts  from  the  Street  end 
might  create  charges  or  credits  long  before  or  long  after  the 
contracts  were  settled  in  the  customers'  accounts.  In  con- 
clusion, this  statement  can  be  made :  If  all  contracts  were 
closed  with  the  Street  and  with  customers,  let  us  say  at  a 
period  of  dissolution,  the  net  losses  or  the  net  profits  on 
customers'  contracts  would  equal  the  amount  of  cash  paid  to 
or  received  from  the  Street. 

How,  then,  is  it  possible  at  any  time  to  prove  the  correct- 
ness of  the  Contract  Differences  account  ?  How  is  it  possible 
to  prove  the  accuracy  of  the  debit,  representing  an  asset,  or 
the  credit,  representing  a  liability  ? 

Point  Balance 

The  answer  to  the  foregoing  question  requires  a  dis- 
cussion of  the  "Point  Balance"  method  of  reconciling  the 
Contract  Differences  account. 

The  closed  contracts  of  customers  and  settled  contracts 
in  the  Street,  give  rise  to  charges  and  credits  in  the  Contract 
Differences  account.  The  open  contracts  of  customers  and 
unsettled  contracts  in  the  Street  will,  when  finally  liquidated, 
create  further  charges  and  credits  to  the  account  in  question. 
But  meanwhile  it  becomes  necessary  to  reconcile  the  Con- 


CONTRACT  DIFFERENCES^POINT  BALANCE       171 

tract  Differences  account,  for  the  reason  that  only  through 
it  is  a  control  of  the  Street  books  made  possible. 

The  presumption  that  this  question  is  one  for  the  auditor 
to  answer  is  erroneous,  because  a  constant  check  upon  the 
Street  books  is  essential  to  assure  accuracy  in  the  operation 
of  the  business.  For  this  reason  a  point  balance  is  taken  at 
the  close  of  each  month's  transactions  to  prove  the  balance 
which  is  to  be  found  in  the  Contract  Differences  account. 
The  process  of  taking  a  point  balance  can  best  be  explained 
by  a  concrete  example  such  as  would  be  found  in  actual 
practice.  We  will  therefore  follow  a  series  of  items  through 
the  customers'  division,  and  the  same  items  through  the 
Street  division  as  well.  On  January  22,  the  following 
purchases  were  made  for  a  client : 

200  March  at  12.60 
300  "  "  1270 
500      "       "  12.75 

Also  the  following  purchases  for  other  clients : 

200  July       at  12.50 
300  October  "  12.32 

On  January  •6,  the  customer  who  purchased  1,000  March, 
sold: 

400  March  at  12.82 
100      "       "  12.81 


leaving  a  balance  long  of  500  March  at  12.75. 

On  January  8,  500  July  were  sold  at  12.31,  representing 
a  short  sale  of  another  client. 

On  January  10,  500  December  were  sold  at  12.20. 

From  the  customers'  standpoint,  the  only  transactions 
which  would  be  closed  by  an  account  sales  seem  to  be  the 
200  March  at  12.60  and  300  March  at  12.70  against  the  sale 


w 


172 


COTTON    BROKERAGE 


of  400  at  12.82  and  100  at  12.81.  The  gross  profit  to  the 
customer  would  be  79  points,  or  $395.  Consequently  the 
Contract  Differences  account  would  be  charged  with  a  like 
sum,  the  customer  be  credited  with  $295,  and  the  Commis- 
sion account  with  $100.  We  are  primarily  concerned  with 
the  charge  to  the  Contract  Differences  account,  for  it  is  this 
account  which  is  to  be  treated  in  relation  to  the  point  balance, 
the  other  factors  such  as  commission  and  customers'  charges 
or  credits,  having  no  present  bearing. 

The  only  charge  thus  far  in  the  Contract  Differences 
account  is  $395.    What  operations  have  gone  on  in  the  Street 
division?     Let  us  assume  that  the  500  March  bought  at 
12.75  were  settled  against  the  sale  of  400  at  12.82  and  100 
at  12.81.     This  settlement  might  have  been  made  directly; 
that  is,  the  same  broker  may  have  been  dealt  with  in  both 
purchase  and  sale.     This  condition,  however,  is  not  a  usual 
one.      Secondly,  the  500  bales  on  either  side  might  have 
been  settled  by  ringing.      It  is  of  minor  concern  to  the 
broker  through  what  means  a  Street  settlement  is  effected. 
This  settlement  might  have  been  made  a  week  or  ten  days 
after  the  customer's  liquidation.     On  this  particular  Street 
transaction  the  broker  will  have  received  from  the  Clearing 
House  or  from  the  second  broker  direct,  34  points  or  $170. 
This  is  arrived  at  in  the  following  manner,  considering  these 
three  transactions : 

500  March  bought  at  12.75 
400  "  sold  "  12.82 
100      "      sold        "   12.81 

The  difference  between  12.75  and  12.82  on  400  bales  is  28 
points,  and  that  between  12.75  and  12.81  is  6  points,  making 
a  total  of  34  points,  or  $170.  The  Contract  Differences 
account  would  receive  credit  for  this  amount  against  the 
receipt  of  cash. 


CONTRACT   DIFFERENCES-POINT   BALANCE       173 

Proof  of  Contract  Differences  Account 

Assuming  that  the  last  of  the  month  has  arrived,  we  will 
set  about  proving  by  means  of  the  point  balance  system,  that 
the  debit  balance  of  $225  appearing  in  the  Contract  Dif- 
ferences account  is  correct.  The  following  eight  steps  arc 
employed  to  obtain  this  proof: 

1.  As  all  contracts  are  resolvable  into  points,  proceed  to 
extend  all  open  contracts  of  customers  in  this  manner. 
Thus,  on  the  purchase  side  of  the  Customers*  Open  Trades 
account,  Form  46,  the  points  representing  the  open  con- 
tracts, are  determined  as  follows : 

500  March    at  12.75  equals    6,375  points 
200  July        "  12.50      "        2,500      " 
300  October  "  12.32      "        3.696 


n 


ii 


Total 12,571 

2.  On  the  sales  side  the  points  are  found  as  follows : 

500  July  at  12.31  equals    6,155  points 
500  Dec.  "  12.20      *'       6,100      " 

Total 12,255      " 

3.  Deduct  the  lesser  number  of  points  from  the  greater. 
Thus :  12,571  —  12,255  =-  316  points  debit. 

4.  Construct  a  "dummy"  ledger  account  called  "Contract 
Differences'*  and  apply  this  debit  of  316  points  to  the  credit 
side  of  the  dummy.  (See  Form  48.)  Resolved  into  terms 
of  money,  this  would  be  equivalent  to  $1,580.  Enter  on  the 
debit  side  of  the  dummy  account  the  balance  of  $225  from 
the  true  Contract  Differences  account.  The  dummy  account 
then  contains  two  factors : 

(a)  The  debit  of  $225  as  taken  from  the  true  Contract 

Differences  account;  and 

(b)  A  credit  of  $1,580,  which  is  the  amount  just  ap- 

plied as  a  test  figure. 


fc 


Ill 


174 


COTTON    BROKERAGE 


5.  This  step  deals  with  the  working  up  of  figures  of  the 
Street  division.  (See  Form  47.)  On  the  purchase  side,  the 
Street  ledger  will  contain  the  following  open  contracts, 
which  are  shown  resolved  into  points : 

200  March    at  12.60  equals  2,520  points 

300      "  "  12.70      "  3,810 

200  July         "  12.50      "  2,500 

300  October  "  12.32      "  3,696 


t( 


« 


<( 


Total 12,526 


« 


6.  The  open  contracts  on  the  sales  side  of  the  Street 
ledger,  resolved  into  points,  are : 

500  July  at  12.31  which  equals    6,155  points 
500  Dec.  "  12.20      "         "        6,100      " 


Total 12,255 


u 


7.  Deduct  the  lesser  number  of  points  from  the  greater. 
Thus:  12,526 —  12.255  =  271  points  debit.  Resolved  into 
terms  of  money,  this  equals  $1,355. 

8.  Apply  this  $1,355  to  the  debit  side  of  the  Contract 
Differences  dummy.  This  account  now  contains  debits  of 
$225  and  $1,355,  making  a  total  of  $1,580.  This  balances 
the  credit  of  $1,580,  which  proves  that  the  Contract  Dif- 
ferences account,  as  it  appears  in  the  general  ledger,  is  cor- 
rect. It  also  verifies  all  the  open  contracts  in  the  Street 
division  and  in  the  customers'  division  as  to  quantity  and 
prices.  Finally,  it  attests  to  the  correctness  of  the  work  for 
the  month,  as  far  as  the  transactions  and  settlements  are 
concerned. 

If  the  foregoing  transactions  be  multiplied  a  hundred- 
fold, as  would  be  found  in  actual  practice,  the  necessity  of 
the  point  balance  method  would  become  infinitely  greater. 


CONTRACT  DIFFERENCES— POINT   BALANCE 


175 


Confirmation  Slips 

Before  the  bookkeeper  in  charge  of  the  Street  records 
attempts  to  compile  the  figures  to  be  used  in  the  point 
balance,  he  confirms  or  checks  up  with  the  brokerage  con- 
cerns which  hold  the  other  end  of  the  transactions,  all  open 
trades — whether  purchases  or  sales — as  to  price  and  quan- 
tity. The  confirmations  are  made  by  means  of  "Confirma- 
tion of  Open  Trade  Slips,"  which  are  sent  out  by  the 
bookkeeper  to  the  other  brokers  for  their  signatures.  These 
slips  contain  a  request  for  their  return  to  the  broker  issuing 
them.  Thus  the  information  for  the  point  balance  is  really 
gathered  from  the  signed  confirmation  slips,  w^hich  serve  as 
a  check  on  the  Street  records  and  give  a  sound  basis  for 
facts  and  figures  necessary  for  the  point  balance. 


CHAPTER    XXII 

TRANSACTIONS   OF   A   COTTON   BROKERAGE 

HOUSE— GENERAL 

Typical  Transactions 

The  typical  transactions  of  a  cotton  brokerage  business 
most  frequently  encountered  are : 

1.  Direct  purchases 

2.  Direct  sales 

3.  Hedging 

4.  Speculation 

5.  Straddles 

1.  Direct  Purchases.  Direct  purchases  by  mills  and  spot 
merchants  presuppose  that  the  delivery  of  and  payment  for 
cotton  are  made  as  it  is  desirable. 

Mill  operators  seldom  enter  the  futures  market,  since 
they  are  able  to  satisfy  all  their  needs  by  purchases  in  the 
spot  market.  However,  the  actual  markets  may  be  demor- 
alized, and  then  resort  is  had  to  futures. 

The  spot  merchant,  on  the  other  hand,  uses  the  futures 
market  for  most  of  his  business.  He  sells  to  the  mill  and 
immediately  buys  that  option  month  in  which  he  is  expected 
to  make  delivery  to  the  mill.  Before  the  option  becomes 
due,  he  may  buy  the  cotton  in  the  spot  market  and  sell  his 
futures.  With  the  spots  so  purchased,  he  can  then  fill  his 
contract  with  the  mill. 

2.  Direct  Sales.  Direct  sales  by  the  planter  contem- 
plate the  actual  shipment  of  cotton  and  immediate  payment 
thei  ef  or  by  the  purchaser  to  the  planter. 

Suppose  a  cotton  grower  sells  his  cotton  on  a  New  York 

176 


TRANSACTIONS— GENERAL 


177 


contract.  After  the  samples  are  classified,  the  cotton  is  sent 
on  to  a  licensed  warehouse,  weighed  and  compared  with  the 
sample.  The  buyer  comes  into  possession  of  the  warehouse 
receipts  and  makes  payment  to  the  planter  to  settle  the  trans- 
action. 

This  subject  is  treated  more  fully  in  Chapter  XXV,  in 
connection  with  spot  market  transactions. 

3.  Hedging.  The  hedging  method  of  trading  may  be 
used  by  planter,  spot  merchant,  or  speculator.  The  planter 
seeks  to  protect  himself  against  damages  resulting  from  his 
inability  to  make  delivery  against  his  sale.  Such  inability 
might  be  caused  by  a  failing  crop.  Again,  he  may  have 
sold  his  product  at  a  stated  price,  long  before  the  cotton  was 
in  actual  existence.  Then,  when  his  crop  is  realized,  if  there 
is  a  small  supply  throughout  the  country,  the  price  of  cotton 
may  have  risen  100  points.  In  that  case,  unless  the  planter 
has  purchased  futures  against  his  contracted  sale  and  thus 
protected  himself,  he  will  lose  this  increment. 

The  spot  merchant,  as  already  stated,  uses  the  hedging 
plan  much  in  the  same  manner  as  does  the  planter.  The 
speculator  hedges  in  order  to  escape  additional  loss  on  long 
contracts  in  a  declining  market,  and  on  short  commitments 
during  an  upward  movement. 

4.  Speculation.  Many  traders  make  a  close  study  of 
crop  conditions  and  then  speculate  in  futures  on  the  basis  of 
the  information  so  acquired.  Speculation  in  cotton  futures 
is  as  prevalent  as  speculation  in  stocks.  However,  more 
factors  enter  into  the  price-making  of  cotton  and  other  com- 
modities than  of  stocks.  Security  values  for  the  most  part 
rise  and  fall  on  the  basis  of  strength  or  weakness  in  earnings. 
The  commodity  markets,  on  the  other  hand,  are  so  sensitive 
to  financial,  economic,  and  general  commercial  conditions, 
that  a  close  study  of  all  these  conditions  is  essential  to  opera- 
tion in,  or  an  understanding  of,  the  speculative  phase  of  the 


178 


COTTON    BROKERAGE 


futures  market.  A  study  of  price-making  involves  so  many- 
technicalities  and  is  so  broad  that  the  subject  of  speculation 
cannot  be  treated  in  detail  here. 

5.  Straddles.  Another  method  of  trading  is  known  as 
the  "straddle."  Invariably,  all  contracts  approaching  the 
day  of  expiration  sell  either  at  a  premium  over  other  months 
or  at  a  discount.  Where  the  demand  for  immediate  use  is 
very  large,  the  cotton  which  is  most  quickly  deliverable  will 
command  the  highest  price,  and  as  between  March  and  May, 
March,  which  is  the  first  expiring  month,  might  sell  at  a 
premium  over  May.  If  the  supply  is  extremely  large,  March 
contracts  might  sell  below  the  price  for  May.  For  example, 
the  operator  who  makes  a  study  of  supply  and  demand  condi- 
tions, might  purchase  500  March  at  12.10  and  sell  500  May 
at  11.92.  This  trade  is  made  at  a  difference  of  18  points 
between  March  and  May.  As  the  due  date  arrives  for 
March  delivery,  the  demand  is  small  and  the  price  drops  so 
that  the  difference  between  the  two  months  might  be  65 
points  and  a  gross  profit  result  of  235  points,  or  $1,175.  A 
transaction  of  this  sort  is  known  as  a  "straddle." 

Notice  of  Delivery 

All  purchases  whether  they  are  direct,  hedged,  or 
straddled,  are  passed  through  the  books  in  the  customary 
way.  When  the  option  month  in  which  the  contract  was 
made  nears  the  point  of  expiration,  the  direct  purchasers, 
such  as  the  mill  and  the  spot  merchant,  contemplate  the 
actual  receipt  of  the  commodity.  The  hedger  and  the 
straddler  make  known  their  intentions  to  the  broker  before 
the  "Notice  of  DeHvery"  (Form  49)  is  served  on  the  latter 
to  the  effect  that  the  person  issuing  the  notice  is  ready  and 
willing  to  deliver  the  number  of  bales  of  cotton  called  for 
by  the  contract. 

Considering  the  first  class  of  customers — the  mill  and  the 


TRANSACTIONS— GENERAL 


179 


spot  merchant — ^the  notice,  when  issued  to  the  buyer,  is 
"stopped."  This  means  that  the  person  stopping  the  notice 
thereby  signifies  his  intention  to  receive  the  cotton  at  the 
price  which  is  set  by  the  Exchange  to  operate  as  the  notice 
price.  (See  Form  50.)  The  issuing  broker,  according  to 
the  tenor  of  the  notice,  indicates  his  intention  to  deliver  to 
the  person  who  "stops"  the  notice. 

To  illustrate,  suppose  White  &  Co.  hold  a  contract  with 
Fairfield  &  Co.  for  the  delivery  of  100  bales  of  January, 
purchased  by  White  &  Co.  for  the  account  of  the  American 
Cotton  Mills  at  12.10.  Suppose  further,  that  the  concern 
issuing  the  notice  is  Hamlin  &  Co.,  and  that  the  notice  price 
is  13  cents. 

The  notice  to  deliver  is  always  transferable ;  that  is,  the 
seller  may  transfer  to  the  buyer,  who  in  turn,  may  transfer, 
by  a  so-called  indorsement,  to  any  broker  to  whom  the 
transferor  might  have  sold  the  same  quantity  of  the  option 
concerned.  This  practice  may  continue  throughout  the  day 
until  the  notice  of  delivery  is  stopped.  In  the  illus- 
tration cited,  the  notice  covering  100  bales  of  January  cotton 
will  follow  the  described  course  until  it  comes  into  the  pos- 
session of  Fairfield  &  Co.  Then,  within  fifteen  minutes 
from  its  receipt  by  Fairfield  &  Co.,  White  &  Co.  will  receive 
and  stop  the  notice.  The  effect  of  these  transfers  is  com- 
parable to  the  ringing  process  of  settling  contracts  which  has 
already  been  explained.  Eventually,  White  &  Co.  will 
receive  a  warehouse  certificate  upon  payment  of  $6,500, 
which  is  the  cost  of  100  bales  at  the  notice  price  of  13  cents  a 
pound. 

Adjustment  of  Difference  between  Purchase  and  Notice 
Prices 

The  question  may  arise  as  to  how  the  difference  between 
the  purchase  price  and  the  notice  price  is  adjusted.     In  the 


i8o 


COTTON    BROKERAGE 


foregoing  example,  the  100  January  was  purchased  at  12.10, 
which,  resolved  into  terms  of  dollars,  is  equivalent  to  $6,050. 
In  White  &  Co.'s  Street  ledger,  under  the  account  with 
Fairfield  &  Co.,  the  purchase  price  would  appear  as  12.10. 
After  the  notice  has  been  delivered  to  White  &  Co.,  an  offset 
must  be  made  in  the  account  to  show  the  delivery  by  Fair- 
field &  Co.  While  the  direct  purchaser  will  be  called  upon 
to  pay  $6,500,  instead  of  $6,050,  he  will  receive  the  differ- 
ence of  $450  from  the  broker  with  whom  he  made  the 
original  commitment.  That  is,  White  &  Co.  would  bill 
Fairfield  &  Co.  for  the  difference  between  12.10  and  13, 
which  is  90  points,  or  $450.  But  between  the  time  of  stop- 
ping the  notice  and  of  receiving  the  warehouse  receipt,  other 
items  will  have  entered  into  this  spot  transaction,  such  as 
storage,  insurance,  labor,  and  sometimes  freight  charges. 
All  these  incidentals  are  charged  to  the  customer. 

Sales  for  Actual  Delivery 

Let  us  now  consider  how  a  sale  for  actual  delivery  is 
handled.  Suppose  a  planter  wishes  to  sell  his  output  long  in 
advance  of  the  crop's  realization.  In  accordance  with  the 
grading  rules  of  the  Cotton  Exchange  and  the  Department 
of  Agriculture  of  the  United  States,  he  can  sell  only  a  classi- 
fied standard  grade  of  cotton.  Assuming  that  his  product 
comes  within  the  classification,  he  sells  through  some  broker 
in  New  York  or  New  Orleans — in  the  present  instance 
through  Hamlin  &  Co.  of  New  York.  Upon  the  first  notice 
day,  Hamlin  &  Co.  will  be  called  upon  to  issue  a  notice. 
This  they  do.  According  to  the  rules,  they  must  deliver  the 
number  of  bales  called  for.  Each  notice  (Form  49)  calls  for 
the  delivery  of  100  bales.  The  cotton  is  subsequently 
shipped,  inspected,  and  graded.  If  it  comes  within  the  pre- 
scribed classification,  the  contract  is  settled  by  payment  to 
Hamlin  &  Co.  of  the  notice  price. 


TRANSACTIONS— GENERAL 


l8l 


Adjustment   of   Difference   between   Sale   and   Purchase 
Prices 

Taking  as  a  basis  for  further  illustration,  the  purchase 
and  sale  of  100  January  at  12.10,  we  will  now  see  how  the 
difference  between  the  sale  and  purchase  prices  is  adjusted 
from  the  seller's  end.  The  option  was  sold  to  Fairfield 
&  Co.  at  12.10,  entitling  Hamlin  &  Co.  to  $6,050.  But 
according  to  the  notice  price  they  receive  $6,500  from 
White  &  Co.  Turning  again  to  the  White  &  Co.'s  Street 
ledger,  we  find  under  the  account  with  Fairfield  &  Co., 
100  January  sold  at  12.10;  and  we  find  also  that  the  con- 
tract was  offset  at  13.  Having  sold  at  12.10  but  delivered 
at  13,  Hamlin  &  Co.  have  received  $450  more  than  the 
original  contract  called  for,  which  amount  is  due  and  pay- 
able to  Fairfield  &  Co.  Nothing  need  be  said  here  as  to 
the  actual  method  of  settlement  pursued,  as  the  four 
methods  of  settlement — direct  settlement,  ringing  method, 
Street  let-out,  and  tender  of  notice — have  already  been 
fully  treated  in  Chapter  XX. 

Expiration  of  Options 

Turning  for  a  moment  to  hedged,  straddled,  and  long 
transactions,  it  will  be  found  that  customers  who  are  carry- 
ing the  long  side  of  an  option  approaching  expiration, 
will  invariably  sell  or  be  compelled  to  sell  as  soon  as  the 
notice  is  tendered.  The  broker  to  whom  the  contracts  are 
sold  is  the  person  to  whom  the  notice  is  immediately  trans- 
ferred, thereby  consummating  the  deal. 

Customers  who  are  short  of  an  option  whose  expira- 
tion is  nearly  due,  usually  cover  or  buy  in  the  shortage  in 
order  to  escape  the  liability  of  actual  delivery. 

On  long  contracts,  the  options  must  be  disposed  of  as 
soon  as  the  notice  is  tendered.  On  short  contracts,  how- 
ever, the  seller  may  remain  short  of  his  contract  until 


l82 


COTTON    BROKERAGE 


the  last  notice  day.  This  is  usually  12  o'clock  noon  of 
the  last  day  of  the  month— Sunday  excepted.  Ten  minutes 
is  the  time  allowed  for  the  transferring  of  notices  on  the 
last  day.    This  is  technically  known  as  a  "short  notice." 

Broker's  Net  Interest 

A  condition  might  exist  where  one  customer  is  long 
and  another  short  of  the  same  month.  From  the  broker's 
point  of  view,  this  is  known  as  a  "net  interest."  In  prac- 
tice it  operates  somewhat  in  this  manner: 

As  soon  as  the  broker  receives  a  notice  to  deliver,  he 
sends  or  transfers  it  to  the  person  to  whom  he  has  sold. 
From  the  customers'  standpoint,  one  would  still  be  long 
and  the  other  short  of  the  month  in  question,  but  unless 
actual  receipt  and  delivery  is  intended,  the  customers  will 
be  compelled  to  buy  in  the  case  of  a  short,  or  to  sell  in 
the  case  of  a  long,  on  or  before  the  last  notice  day.  If 
the  short  customer  covers  before  this  time,  and  notice  of 
delivery  is  sent  to  the  broker,  it  will  compel  the  sale  of  the 
long  contract  immediately. 

Borrowing  a  Place 

Very  often  a  customer  having  a  heavy  long  interest  in 
the  market  desires  to  carry  his  contracts  until  the  last  notice 
day— this  for  the  reason  that  the  price  may  greatly  advance 
as  the  option  nears  expiration.  Under  the  customary 
methods  of  business,  long  contracts  cannot  be  carried  beyond 
the  time  of  receipt  of  the  notice.  Frequently  assistance 
is  rendered  by  a  fellow  broker  who  is  short  of  the  same 
option  and,  in  this  position,  is  allowed  to  remain  short 
until  the  last  notice  day.  He  is  therefore  able  to  give  a 
place  to  the  broker  carrying  the  longs.  To  carry  out  the 
arrangement,  the  notices  as  soon  as  they  are  received  by 
the  longs,  are  transferred  to  the  broker  who  has  offered 


TRANSACTIONS— GENERAL  183 

accommodation,  and  the  "long"  broker  is  then  said  to 
"borrow  a  place."  Such  a  transaction  has  the  effect  of 
placing  two  fictitious  entries  upon  the  Street  ledger.  One 
attests  that  the  long  broker  has  "sold"  the  number  of 
contracts  covered  by  the  notices  to  the  accommodating 
party.  The  other  entry  evidences  a  "purchase"  from  the 
accommodated  broker.  As  the  price  on  either  transac- 
tion is  the  notice  price,  the  operation  in  itself  constitutes 
an  even  settlement  and  a  convenient  set-off.  The  "accom- 
modating" broker  may  cover  his  shortage  and  thereby 
incur  the  possibility  of  receiving  a  notice  against  such 
fictitious  purchase.  As  he  lends  or  gives  names  to  the 
accommodated  broker,  he  is  forced  to  transfer  the  notices  to 
the  latter,  who,  upon  receipt  of  the  notices,  is  compelled  to 
dispose  of  his  longs  in  order  that  he  may  be  able  to  trans- 
fer the  notices  in  his  turn.  The  entries  attesting  to  the 
false  purchase  from,  and  sale  to,  the  accommodating  broker 
are  then  reversed.  The  effect  of  such  a  transaction  is  an 
even  settlement,  as  the  notice  price  would  again  appear 
on  either  side  of  the  books. 

The  practice  of  giving  or  borrowing  a  place  is  in  vio- 
lation of  the  rules  of  the  Exchange.  It  is  mentioned  here 
merely  to  indicate  one  of  the  methods  of  carrying  long 
transactions  beyond  the  fair  time  of  actual  receipt  or  com- 
pulsory sale  of  the  cotton. 


CHAPTER    XXIII 

TRANSACTIONS    OF    A    COTTON    BROKERAGE 

HOUSE— INCIDENTAL 

Branch  Offices 

^  The  vast  majority  of  cotton  brokerage  concerns  main- 
tain branch  offices  throughout  the  South.  This  is  done 
for  the  purpose  of  obtaining  advices  pertaining  to  crop 
conditions,  and  as  a  medium  for  procuring  Southern 
business. 

Solicitors 

According  to  the  rules  of  the  Exchange,  no  concern 
may  enter  into  a  contract  of  employment  between  itself 
and  solicitors  for  a  period  of  less  than  one  year.  In  most 
cases  the  renewal  of  such  contracts  naturally  depends  upon 
the  amount  of  business  which  has  been  produced  by  the 
solicitors. 

In  order  to  keep  account  of  the  business  produced  by 
the  solicitors,  a  production  record  is  employed.  This 
record  (Form  51)  gives  the  number  of  bales  solicited 
during  a  day,  week,  month,  and  year,  and  the  commission 
resulting  therefrom.  Opposed  to  the  production  figures 
are  the  factors  of  expense,  including  solicitors'  salaries, 
traveHng  expenses,  and  rent  for  branch  offices,  if  any. 
Deducting  the  total  expenses  of  any  solicitor  from  his 
production  figures,  reflects  the  margin  of  profit  for  that 
sohcitor.  The  commissions  are  figured  at  $10  for  each 
100  bales. 

Each  day's  record  of  purchases  and  sales  is  analyzed 
for  the  purpose  of  allocating  the  respective  units  in  the 

184 


TRANSACTIONS-INCIDENTAL 


185 


proper  solicitors'  columns.  The  production  record  con- 
tains also  a  record  of  the  business  resulting  from  partners' 
production  or  "local"  activities. 

Floor  Brokerage  Business 

Many  Exchange  members  make  a  practice  of  execut- 
ing orders  for  other  brokers  at  a  charge  of  $1  for  each 
100  bales  bought  or  sold.  At  the  end  of  each  month  a 
bill  is  rendered  which,  when  paid,  is  credited  to  an  account 
known  as  "Floor  Commissions  Received." 

Clearances 

When  a  broker  has  bought  and  sold  an  option  for  his 
personal  account,  and  does  not  desire  to  carry  the  contracts 
until  settled,  he  may  ask  another  concern  to  "clear"  for 
him.  Clearances  can  be  compared  to  the  ordinary  pur- 
chase and  sale  for  the  account  of  a  customer.  The  com- 
mission charged  on  such  transactions  is  $1.50  for  the 
"round  trade" ;  that  is,  for  purchase  and  sale.  The  usual 
account  sales  is  rendered,  and  the  commission  is  credited 
in  the  regular  way.  At  the  end  of  the  month,  however, 
such  items  are  segregated  by  means  of  a  summary,  and 
credited  to  an  account  known  as  "Clearance  Commissions." 

Carrying  Transactions 

Another  source  of  income  in  the  cotton  brokerage 
business  is  derived  through  the  carrying  of  transactions 
for  other  members  of  the  Exchange. 

A  goodly  number  of  the  brokers  speculate  in  the  market 
for  their  own  account.  They  seldom  carry  their  own  con- 
tracts, usually  asking  some  other  concern  to  carry  their 
commitments.  When  these  accounts  are  subsequently  closed, 
a  commission  of  $5  is  charged  by  the  carrying  broker  on 
both  the  purchase  and  the  sale;  that  is,  $10  on  the  round 


i86 


COTTON    BROKERAGE 


transaction.  Here,  again,  an  account  sales  is  rendered 
and  the  brokerage  earned  is  credited  to  the  Commission 
Earned  account. 

Change  of  Name  or  Price 

Floor  brokers  executing  orders  sometimes  act  in  the 
capacity  of  agent  and  principal  at  the  same  time.  If  a 
floor  member  receives  an  order  to  buy  100  January  at  12.70, 
he  may  sell  it  for  his  own  account.  Later  in  the  day  he 
may  make  a  purchase  at  12.65  against  this  "short."  After 
the  close  of  the  Exchange,  he  will  request  the  principal 
m  the  origmal  transaction  to  "change  a  name"  or  "change 
a  price."  In  other  words,  he  substitutes  in  place  of  his 
own  name  on  the  purchase  of  the  January  at  12.70,  the 
name  of  the  broker  from  whom  the  January  at  12.65^  was 
purchased. 

To  illustrate,  let  us  say  that  the  January  at  12  65  was 
bought  from  Robinson  &  Co.,  that  W.  Spencer  was  the 
broker,  and  John  Brown  the  customer.  The  entry  on  the 
purchase  side  of  the  blotter  would  then  appear  as  follows  • 


100 
100 


W.  spencer 
John  Brown 


On  the  sales  side  the  entry  would  be: 


Bales 


100 


To  Whom  Sold 


W.  Spencer 


Price 


12.70 


Customer 


W.  Spencer 


The  charge  for  such  transactions  is  50  cents  for  the 
purchase  and  sale  combined.  An  account  sales  is  rendered, 
and  the  brokerage  is  credited  in  the  usual  manner.     All 


TRANSACTIONS— INCIDENTAL 


187 


such  items  are  summarized  at  the  end  of  the  month,  and 
passed  to  the  credit  of  the  Commission  account. 

Half-Commission  Brokerage 

Many  of  the  firms  having  membership  on  the  Exchange 
neither  clear  nor  carry  the  commitments  of  their  customers. 
There  are  various  reasons  for  this.  It  is  sometimes  due 
to  the  fact  that  there  is  a  reluctance  to  tie  up  money  un- 
necessarily, as  in  original  or  Street  margins. 

In  such  cases,  by  arrangement  with  another  concern, 
the  first  concern  can  conduct  its  business  on  a  half-com- 
mission basis.  That  is,  while  the  charge  to  the  customer 
is  the  usual  $20  for  the  purchase  and  sale  of  a  contract, 
the  brokerage  concern  is  only  charged  $10  by  the  carry- 
ing house  for  every  hundred  bales  bought  and  sold— that 
is,  $5  on  the  purchase  and  a  like  brokerage  charge  on  the 
sale. 

Under  such  circumstances,  no  Street  books  are  kept  by 
the  half-commission  broker,  for  the  need  for  such  records 
is  never  present.  Nor  is  there  any  necessity  for  his  keep- 
ing Contract  Differences  account,  as  this  phase  of  the  pur- 
chases and  sales  of  each  customer  is  the  problem  of  the 
"carrying"  house.  For  example,  customer  A  through  his 
broker  who  is  operating  on  the  half-commission  basis,  buys 
100  January  at  12.10  and  sells  100  January  at  11.90, 
thereby  losing  20  points,  or  $100.  Adding  the  commis- 
sion of  $20,  his  total  loss  is  $120.  A*s  broker  instructs 
the  carrying  house  to  apply  or  close  out  100  January  bought 
at  12.10  against  the  sale  at  11.90.  As  far  as  contract 
differences  are  concerned,  there  would  be  none.  However, 
assuming  for  the  moment  that  such  an  account  is  in  opera- 
tion, the  credit  to  the  account  would  be  $100,  but  imme- 
diately this  amount  would  be  offset  by  a  charge  to  it  and  a 
credit  to  the  carrying  broker. 


II 


l88  COTTON    BROKERAGE 

The  question  might  properly  be  asked,  "How,  then,  is 
the  entry  made  on  the  books  of  A's  broker?"  It  is  made 
through  the  medium  of  the  general  journal,  in  this  manner: 

Debit  Customer  A $120.00 

Credit  Carrying  Broker 1 10.00 

Credit  Commission 10.00 

An  account  sales  is  rendered  to  the  customer,  but  it 
acts  only  as  material  for  the  journal  entry.  Nothing  more 
is  done  with  it. 

As  may  be  inferred,  no  analysis  journal  is  necessary 
in  such  transactions. 


CHAPTER    XXIV 

TRANSACTIONS    OF    A    COTTON    BROKERAGE 
HOUSE— CLOSING  THE   BOOKS 

Adjusting  Entries 

Before  closing  the  books  of  a  cotton  brokerage  house, 
a  number  of  adjustments  are  necessary.  The  most  com- 
mon ones  are: 

1.  Provision  for  reserve  for  depreciation  on  furniture 
and  fixtures. 

2.  Provision  for  reserve  for  doubtful  accounts  receivable. 

3.  Provision  for  doubtful  and  uncollectible  accounts 
receivable  written  off. 

4.  Provision  for  accruals  of : 

(a)  Interest  on: 

(1)  Street  margins  unreleased 

(2)  Notes  receivable 

(3)  Notes  payable 

(b)  Rent 

(c)  Office  salaries 

5.  If  securities  be  held  for  investment  purposes,  suitable 
provision  should  be  made  for  any  depreciation  in  market 
values. 

6.  All  items  under  floor  brokerage  receivable  or  pay- 
able should  be  evidenced  by  the  books,  so  that  a  proper 
accounting  can  be  had  of  the  earning  or  expense  in  con- 
nection therewith. 

7.  In  businesses  which  are  conducted  on  a  cash  basis, 
the  usual  tendency  is  to  overlook  items  of  expense  for 
which  no  bills  have  been  received.     To  avoid  an  over- 

189 


!' 


IpO 


COtTON    BROKERAGE 


Statement  of  profits,  due  to  an  understatement  of  expenses, 
suitable  provision  should  be  made  for  such  items  as  bills 
due  and  unpaid,  estimated  traveling  expenses,  and  the  like. 

Income  and  Expense  Factors 

The  sources  of  income  in  the  cotton  brokerage  business 
and  the  general  expense  factors  incident  to  the  operation 
of  the  business,  including  both  main  office  and  branch 
offices,  are  as  follov^s: 

Income  Factors 

1.  Commission  from  all  sources 

2.  Interest  on  notes  receivable 

3.  Interest  on  Street  margins 

4.  Interest  on  bank  balances 

5.  Dividends  on  securities 

Expense  Factors 

1.  Rent  of  offices 

2.  Salaries 

3.  Advertising 

4.  Telegraph 

5.  Telephone 

6.  Ticker  service 

7.  Market  reports  and  bulletins 

8.  Postage 

9.  Stationery  and  printing 

10.  Legal  services 

11.  Collection  on  out-of-town  checks 

12.  Traveling  expenses 

13.  Entertainment 

THE  FINANCIAL  STATEMENT 

I.  Statement  of  Income 
1.  Income  from  operation 


TRANSACTIONS— CLOSING  THE   BOOKS 


191 


The  main  source  of  income  from  the  operation  of  the 
business  is  commission  derived  from  the  various  sources 
already  explained. 

II.  Administrative  Expense 

1.  Rent  of  offices 

2.  Salaries 

3.  Advertising 

4.  Telegraph 

5.  Telephone 

6.  Ticker  service 

7.  Market  reports  and  bulletins 

8.  Postage 

9.  Stationery  and  printing 

10.  Legal  expense 

11.  Collection  on  out-of-town  checks 

III.  Bbianch  Office  and  Solicitors*  Expense 

1.  Branch  office  rent 

2.  Agents'  and  solicitors'  salaries 

3.  Traveling  expense 

4.  Entertainment  expense 

IV.  Net  Income  from  Operation 

The  net  income  from  operation  is  determined  by  de- 
ducting the  total  expense  from  the  income;  i.e.,  I —  (II  + 
III);  or,  I  — II  — m. 

V.  Secondary  Income 

Aside  from  commission,  which  is  the  main  source  of 
income,  the  following  four  items  may  be  considered  as 
secondary  income: 

1.  Interest  on  notes  receivable 

2.  "         "    Street  margins 

3.  "         "    bank  balances 

4.  "         or  dividends  on  securities 


192 


COTTON    BROKERAGE 


I  ! 


VI.  Income  from  All  Sources 

This  is  derived  by  adding  the  net  income  from  opera- 
tion and  the  secondary  income,  i.e.,  IV  +  V,  which  is  the 
same  as,  I  — .  H  _  m  +  y. 

VII.  Deductions  from  Income 

There  are  two  items  of  expense  which  must  be  deducted 
from  the  income,  in  order  to  obtain  net  income ;  viz.  : 

1.  Interest  on  notes  payable 

2.  Exchange  on  out-of-town  checks 

VIII.  Net  Income 

If  the  total  of  "Deductions  from  Income"  is  taken  from 
"Income  from  All  Sources,"  the  result  is  the  net  income, 

which  may  be  written  thus  :   I  —  II  —  III  +  V VII  •  or' 

(I  +  V)  — (Il  +  III-t-VII). 

IX.  Profit  and  Loss  Charges 
Under  this  heading  will  be  brought : 

1.  Loss  on  uncollectible  accounts 

2.  Loss  on  the  sale  of  securities  held  for  investment. 

3.  Provision  for  reserve  for  depreciation  of  furni- 

ture and  fixtures. 

4.  Provision   for  reserve  for  doubtful  accounts  re- 

ceivable. 

5.  Provision  for  reserve   for  sundry  accounts  pay- 

able. 

6.  Provision  for  reserve  for  traveling  expenses. 

X.  Profit  and  Loss  Credits 

1.  Recovery  on  doubtful  accounts  receivable. 

2.  Profit  on  sale  of  securities  held  as  investment. 

XI.  Profit  and  Loss 

Deduct  the  profit  and  loss  charges  (IX)  from  the  profit 
and  loss  credits  (X),  or  deduct  X  from  IX,  as  the  case  may 
be,  and  the  net  profit  and  loss  debit  or  credit  will  be  the 


TRANSACTIONS— CLOSING  THE  BOOKS 


\ 


193 


resultant.  Applying  the  net  profit  and  loss  debit  or  credit 
(XI)  to  the  net  income  (VIII),  (adding  in  case  of  a  credit 
and  subtracting  in  case  of  a  debit),  the  net  surplus  for  the 
accounting  period  will  be  determined. 

The  distribution  of  this  surplus,  according  to  the  articles 
of  copartnership,  will  be  the  final  operation  in  closing  the 
books. 

THE  BALANCE  SHEET 

Assets 

Capital  Assets 

The  only  items  which  ordinarily  appear  as  capital  assets 
are: 

1.  Furniture  and  fixtures 

2.  Securities  held  for  investment 

3.  Membership  on  exchange 

Current  Assets 

Under  this  heading  are  the  following  items: 

1.  Cash  on  hand  and  at  banks 

2.  Accounts  receivable — considered  good 

3.  Street  margins 

4.  Notes  receivable 

5.  Accrued  interest  on  Street  margins 

6.  Accrued  interest  on  notes  receivable 

7.  Contract  differences  (this  may  sometimes  appear 

as  a  liability) 

Deferred  Debits 

Under  the  heading  of  deferred  debits  may  be  listed  the 
following  items : 

1.  Rent  paid  in  advance 

2.  Membership  dues  paid  in  advance 

3.  Insurance  paid  in  advance  (on  spot  transactions) 


194  COTTON    BROKERAGE 

4.  Telephone  privilege  on   New   York  Cotton  Ex- 
change,  paid  in  advance 

Liabilities 
Capital  Liabilities 

In  the  cotton  brokerage  business  there  are  seldom  found 

any  capital  liabilities.     For  the  most  part,  all  the  debts  of 

the  concern  are  current  in  nature.     The  usual  liability  and 

proprietorship  items  may  be  listed  under  the  two  headings 

Current  Liabilities"  and  "Proprietorship,"  as  shown  below. 

Current  Liabilities 

1.  Customers'  accounts  payable 

2.  Notes  payable 

3.  Interest  accrued  on  notes  payable 

4.  Salaries  accrued 

5.  Contract  differences  (this  may  be  on  the  asset  side 

of  the  balance  sheet) 

Proprietorship 
Reserves : 

1.  Reserve  for  depreciation  on  furniture  and  fix- 

tures 

2.  Reserve  for  depreciation  on  security  investments 

3.  Reserve  for  traveling  expenses 

4.  Reserve  for  other  expenses   for  which  no  in- 

voices have  been  received 

Capital  : 

L  Partner  A's  capital 

2.  Partner  B's  capital 

3.  Partner  C's  capital 

Pa/Il"^^''"? ""^  '^'  ^'"^^'"'^  '"'"^  Customers'  Accounts 
Payable,  reference  must  again  be  made  to  the  table  of 
equities  treated  on  page  12L     The  fact  that  a  customer's 


TRANSACTIONS-CLOSING  THE  BOOKS 


195 


account  shows  a  credit  balance  of  $1,000,  is  no  indication 
that  such  an  amount  is  owing  to  him.  What  must  be 
considered  is  the  loss  or  gain  reflected  in  his  open  contracts. 

The  balance  sheet  should  never  be  read  without  refer- 
ence to  the  table  of  equities. 

The  listing  of  all  assets  and  liabilities  in  the  table  of 
equities  is  less  urgent  in  cotton  brokerage  than  in  the  stock 
business.  In  cotton  brokerage  it  will  be  sufficient  to  com- 
pile a  statement  of  margins  for  the  sole  purpose  of  determin- 
ing the  status  of  the  customers'  accounts  and  the  relation 
which  this  bears  to  the  financial  strength  of  the  business 
in  general. 


Dissolution 

Both  the  voluntary  and  involuntary  dissolution  of  a 
stock  brokerage  business  were  treated  in  a  general  way  in 
Part  I,  and  that  discussion  applies  to  cotton  brokerage  as 
well.  It  may  be  said,  however,  that  the  customers'  interests 
are  not  as  well  guarded  in  the  case  of  a  forced  dissolution 
of  a  cotton  brokerage  house  as  in  the  failure  of  a  stock 
brokerage  house.  In  the  latter  case  the  customers  have 
their  securities  to  fall  back  upon,  while  in  the  cotton  busi- 
ness the  only  realizable  asset  outside  of  those  which  are 
unimpaired,  is  the  membership  seat,  worth  approximately 
$15,000, 


CHAPTER    XXV 

SPOT    COTTON 

Technicalities  of  the  Spot  Market 

In  discussing  cotton  brokerage  accounting  from  the 
standpoint  of  the  futures  market,  we  have  seen  that,  for  the 
most  part,  settlement  among  the  brokers  is  made  by  means 
of  the  "differences"  system.  That  is,  the  actual  receipt  and 
delivery  in  satisfaction  of  the  options  bought  and  sold  are 
seldom  availed  of,  but  in  the  great  majority  of  cases  con- 
tracts are  closed  by  means  of  "rings,*'  "let-outs,"  "direct 
settlements,"  or  "notice  settlements,"  long  before  these  con- 
tracts expire.  To  such  an  extent  is  this  carried  as  to  create 
the  erroneous  impression  that  speculation  alone  is  the  motive 
prompting  such  transactions. 

Although  in  spot  market  transactions,  very  little  actual 
accounting  is  required  as  compared  with  purchases  and  sales 
in  the  futures  market,  there  is  probably  nothing  else  in  the 
business  of  brokerage  so  involved  in  technicalities.  The 
system  employed  in  "taking  up"  a  contract,  or  making  de- 
livery against  an  option  sold,  is  so  different  from  anything 
found  in  general  business  as  to  deserve  further  treatment  in 
its  accounting  phase. 

Details  of  Actual  Delivery 

The  intention  to  "take  up"  a  cotton  contract  is  mani- 
fested by  the  stoppage  of  the  "transferable  notice."  The 
last  holder  is  charged  with  the  duty  of  informing  the  broker 
issuing  such  document,  that  the  former  has  in  his  possession 
the  notice  in  question  and  makes  demand  for  the  delivery  of 

196 


SPOT    COTTON 


197 


the  cotton  within  two  days  from  the  date  of  the  issued 
notice.  This  is  done  by  means  of  a  "Demand  Form"  (Form 
50)  stamped  in  attestation  and  delivered  to  the  broker  upon 
whom  the  demand  is  made.  Such  is  the  procedure  attending 
a  stoppage  of  notice.  The  new  contractual  relations  between 
the  brokers  in  the  transaction  are  recognized  by  the  Superin- 
tendent of  the  Exchange,  who  may  demand  the  fulfilment  of 
the  contract  between  the  parties. 

As  an  illustration  of  the  foregoing,  let  us  assume  that  a 
purchase  of  100  bales  of  December  cotton  is  made  in  May  at 
the  price  of  12.10.  When  the  notice  day  comes,  if  it  is  the 
intention  of  the  buyer  to  assume  the  contract,  he  will  go 
through  the  stoppage  of  notice  formalities  just  described; 
and  upon  the  third  day  from  the  date  of  notice,  documents 
known  as  "Grade  Certificates"  will  be  delivered  by  the  seller 
to  the  buyer  for  examination.  At  the  same  time  the  seller 
delivers  to  the  buyer  a  "Spot  Bill." 

The  grade  certificate  states  the  number  of  bales  which 
each  document  represents;  the  markings  for  identification 
purposes ;  where  the  cotton  is  stored ;  when  inspected  by  the 
Exchange  authorities ;  when  the  certificates  expire ;  and  the 
grades  of  cotton  in  each  case.  This  grade  certificate  is  a  docu- 
ment issued  by  the  Classification  Bureau  of  the  Exchange. 

The  spot  bill  (Form  55)  contains  a  full  statement  of 
charges  and  allowances  covering  the  "weight  price."  It 
also  states  the  cost  for  inspection,  classification,  certification, 
and  storage.  Allowances  for  grade,  weight,  and  storage  of 
cotton  are  items  which  must  be  studied  independently,  if 
they  are  to  be  thoroughly  understood  and  applied  in  prac- 
tice. 

On  the  third  day  after  notice,  warehouse  certificates  cov- 
ering the  actual  commodity  are  delivered  and  the  cotton  is 
paid  for.  This  terminates  the  contractual  relationship 
betwecii  the  brokers  involved  in  the  transactions. 


198 


COTTON    BROKERAGE 


I'll 


Accounting  Entries  for  Actual  Deliveries 

The  first  accounting  entries  when  delivery  of  cotton  is 
made,  are  for  the  purpose  of  getting  the  option  out  of  the 
customers  contract  book.      This  is  accomplished  by  first 
making  a  memorandum  journal  entry  to  the  effect  that  the 
contract  has  been  taken  up.     Then  in  the  space  provided  for 
the  sale,  in  the  customers  contract  book,  the  word  "received'' 
is  inserted  and  reference  is  made  to  the  number  appearing  on 
the  warehouse  certificate.     This  takes  the  transaction  out  of 
the  contract  book.      The  charge  to  the  customer  covering 
the  cost  of  the  cotton  is  made  through  the  cash  book.      In 
transactions  of  this  sort,  commission  of  $25  per  contract 
IS  debited  to  the  customer  through  the  general  journal. 
These  are  the  initial  entries  to  the  customer's  account. 

The  treatment  in  the  Street  books  is  the  next  logical  con- 
sideration.   The  fact  that  the  cotton  was  received  requires 
an  entry  in  the  nature  of  an  offset  against  the  purchase  as  it 
appears  m  the  Street  ledger.     It  will  be  recalled  that  tha 
brokers'  accounts,  as  they  appear  in  that  ledger,  show  the 
purchase  from,  or  the  sale  to,  the  broker  keeping  the  record  ' 
For  example,  if  100  December  at  12.10  were  purchased  by 
Fairfield  &  Co.  from  White  &  Co.,  the  purchase  would  be 
entered  on  the  left  side  of  White  &  Co.'s  account  in  Fair- 
field's Street  ledger,  as  shown  by  Form  52.     If  White  & 
Co.,  or  some  other  concern  for  their  account,  delivered 
warehouse  certificates  in  fulfilment  of  the  contract,  some 
entry  would  be  made  in  the  blotter  to  the  effect  that  100 ' 
bales  of  December  were  tendered  on  notice  at  the  notice 
price.    Assume,  in  this  case,  that  the  notice  price  is  12.40. 
This  information  would  be  posted  on  the  right  side  of 
White  &  Co.'s  account  in  the  Street  ledger,  and  a  bill  would 
be  sent  to  White  &  Co.  for  30  points,  or  $150. 

At  this  point  a  question  may  be  raised  as  to  the  collec- 
tion of  the  $150.      A  clearer  conception  of  the  principle'  . 


SPOT    COTTON 


199 


y 


If. 


involved  may  be  obtained  by  confining  the  transaction  to 
specified  limits;  i.e.,  the  effect  of  .settlement  on,  (a)  White 
&  Co.;  (b)  the  broker  receiving  the  cotton;  and  (c)  the 
person  who  makes  delivery  for  White  &  Co.'s  account. 

Suppose,  in  this  connection,  that  White  &  Co.  sell  to 
Fairfield  &  Co.,  and  buy  from  McFarland  &  Co.,  the  100 
December  at  12.10;  and  McFarland  &  Co.  issue  the  trans- 
ferable notice  at  the  stated  price  of  12.40.  McFarland  &  Co. 
send  the  notice  to  White  &  Co.,  the  concern  which  purchased 
from  them,  and  White  &  Co.  send  it  to  the  firm  which  elects 
to  receive  the  cotton,  Fairfield  &  Co.,  collecting  from  this 
firm  the  amount  based  upon  the  notice  price.  The  settle- 
ment between  Fairfield  &  Co.  and  White  &  Co.  is  effected 
by  the  payment  of  $150  by  the  latter  to  the  former. 

It  now  remains  to  effect  a  settlement  between  McFarland, 
&  Co.  and  White  &  Co.  This  latter  firm  bought  the  cotton 
at  12.10,  and  upon  transfer  of  notice  was  forced  to  settle 
with  Fairfield  &  Co.  at  12.40.  The  contract  was  made  with 
McFarland  &  Co.,  who  are  then  billed  by  White  &  Co.  for  30 
points  or  $150.  McFarland  pays  the  $150  but,  as  already 
explained,  receives  this  difference  from  Fairfield  &  Co.,  the 
firm  taking  up  the  cotton  at  the  time  the  spot  bill  is  sent  to 
the  latter.  Forms  53  and  54  illustrate  the  settlement 
between  White  and  McFarland, 

Limits  of  a  Cotton  Contract  i 

According  to  the  rules  of  the  New  York  Cotton  Ex- 
change, a  contract  weighing  between  49,500  and  50,500 
pounds  must  be  received  in  fulfilment  of  a  transaction.  So 
long  as  the  weight  is  within  these  prescribed  limits,  no  im- 
portance is  attached  to  the  number^  of  bales  involved.  Thus, 
instead  of  containing  100  bales,  a  contract  might  run  from 
4  to  8  bales  over  or  under  that  number.  If  92,  108,  or 
some  other  number  of  bales  make  up  the  necessary  weight, 


I 


200 


COTTON    BROKERAGE 


their  delivery  comes  under  the  regulation  clause  and  is  a 
good  delivery. 

The  laws  of  the  Exchange  provide  that  an  allowance  of 
1/2  pound  per  bale  for  each  month  or  fraction  of  a  month, 
be  made  to  the  buyer,  from  the  time  cotton  is  stored  until 
the  date  of  transfer. 

Let  us  assume  that  warehouse  certificates  show  that  92 
bales  of  cotton,  covered  by  such  certificates  and  weighing 
49,838  pounds,  were  in  the  Manhattan  Stores,  on  May  26, 
1915.  In  this  hypothetical  transaction,  if  the  cotton  was 
stored  on  May  26,  1915  and  transferred  on  contract  on 
December  31,  of  the  same  year,  there  would  be  an  allowance 
in  weight  for  seven  full  months  and  a  fractional  month, 
making,  under  the  rule,  a  total  of  eight  months.  Allowing 
1/2  pound  per  bale  per  month  for  that  period  on  92  bales, 
the  weight  allowance  would  be  368  pounds.  If  this  is  de- 
ducted from  the  gross  weight  of  49,838  pounds,  the  net 
weight  is  49,470  pounds.     (See  Form  55.) 

Cost  of  Contract 

Continuing  the  same  transaction,  the  next  point  for  con- 
sideration is  the  original  cost  of  the  contract.  Multiplying 
the  net  weight  by  the  notice  price  of  12.40,  the  result 
obtained  is  $6,134.28. 

Added  to  the  original  cost  is  the  standard  charge  of 
12  1/2  cents  per  bale  for  inspection,  classification,  and 
grading  certificates.  No  matter  how  often  the  cotton  is 
transferred  from  one  buyer  to  another,  these  charges  obtain. 
On  92  bales  these  incidental  charges  would  be  $11.50, 
making  a  total  cost  of  $6,14578. 

Grades  of  Cotton 

Under  the  rules  of  the  New  York  Cotton  Exchange, 
specified  grades  of  cotton  only  may  be  delivered  on  contract 


r~-> 


SPOT    COTTON 


20I 


The  following  grades  are  admitted  by  the  Classification 
Committee : 


Above  Middling 

Fair 

Strict  middling  fair 

Middling  fair 

Strict  good  middling 

Fully  good  middling 

Good  middling 

Barely  good  middling 

Strict  middling 

Fully  middling 

Strict  good  middling  tinged 

Middling 

Good  middling  tinged 


Below  Middling 

Middling 

Good  middling  tinged 

Barely  middling 

Strict  low  middling 

Fully  low  middling 

Low  middling 

Strict  good  ordinary 

Good  ordinary 

Strict  middling  tinged 

Middling  tinged 

Strict  low  middling  tinged 

Low  middling  tinged 

Middling  stained 


Grade  Premium  and  Discount 

The  basis  for  all  grades  is  middling  cotton.  All  grades 
above  middling  command  a  premium  or  an  addition  to  the 
stated  selling  price,  by  reason  of  the  superior  and  higher 
priced  cotton  entering  the  contract.  On  grades  below 
middling,  an  allowance  is  made  on  account  of  the  inferior 
quality  of  the  cotton.  Each  grade  except  middling  com- 
mands a  certain  number  of  points,  premium  or  discount. 

Reverting  to  the  92  bales  of  cotton  stored  May  26,  1915, 
let  it  be  assumed  that  the  delivery  was  as  follows:  1 
middling,  7  strict  low  middling,  12  fully  low  middling,  48 
low  middling,  23  strict  good  ordinary,  and  1  good  ordinary 
— making  92  bales  according  to  the  contract.  All  of  these 
grades,  excepting  the  middling,  are  below  that  basis,  and  are 
subject  to  a  discount.  On  the  1  bale  of  middling  the  rate  is 
"flat,"  meaning  no  discount  or  premium.     On  the  7  strict 


202 


COTTON    BROKERAGE 


low  middling,  the  discount  is  $.005  a  pound,  or  a  total  of 
$.035 ;  on  12  fully  low  middling,  the  discount  is  $.0085  a 
pound,  making  an  allowance  of  $.102;  on  48  low  middling 
at  $.0125  discount,  the  allowance  is  $.60;  on  23  strict  good 
ordinary  at -$.02  discount,  the  allowance  is  $.46;  and  on  1 
good  ordinary,  the  discount  is  $.03 ;  the  grand  total  being 
$1,227.  Now,  if  we  multiply  the  allowance  of  $1,227  by 
the  net  weight  of  49,470  pounds  (that  being  the  poundage 
to  be  considered),  and  divide  the  product  of  $60,699.69  by 
92  (the  number  of  bales  contained  in  the  contract),  we  will 
get  $659.78,  which  is  the  allowance  made  for  the  inferior 
grades. 

Storage  and  Labor 

The  charge  for  storage  and  labor  in  connection  with  the 
warehousing  of  cotton  is  sometimes  paid  by  the  seller  to  the 
storage  company  up  to  the  time  of  the  sale.  In  the  great 
majority  of  cases,  however,  the  storage  and  labor  charge  is 
allowed  to  accumulate  and  is  deducted  by  the  seller  from 
his  spot  bill  to  the  buyer.  The  charge  for  storage  is  20 
cents  a  bale  for  each  month,  and  10  cents  a  bale  for  half 
months.  The  cost  for  labor  is  10  cents  "in"  and  10  cents 
"out" ;  that  is,  20  cents  for  putting  the  cotton  in  storage  and 
taking  it  out.  The  "out"  storage  charge  is  paid  by  the 
buyer  when  he  releases  his  cotton  from  store,  while  the  "in** 
storage  is  allowed  by  the  seller.  In  the  case  of  the  cotton 
stored  May  26,  1915,  the  storage  and  labor  were  paid  by 
the  seller  up  to  May  26,  1915.  From  that  date  until  De- 
cember 31,  1915,  there  would  be  seven  full  months  of  storage 
at  20  cents,  and  one  half  month  at  10  cents,  or  $1.50  for 
each  bale.  On  92  bales,  therefore,  the  storage  allowance 
would  be  $138. 

The  total  charges  on  this  transaction  are  $6,145.78,  and 
the  total  allowances   for  grade,   storage,   and   labor   are 


SPOT    COTTON 


203 


%797.7^',  therefore  the  net  cost  of  the  contract  to  the  cus- 
tomer, as  shown  by  the  spot  bill,  is  $5,348. 

Customer's  Contract  Difference  Credit 

Let  us  recall  for  a  moment  the  $150  which  the  broker 
collected,  for  the  difference  of  30  points  between  the  pur- 
chase and  notice  prices.  What  interest  has  the  customer  in 
this  sum?  The  charge  to  him  should  be  on  the  basis  of 
12.10.  Therefore,  if  he  was  charged  on  the  basis  of  12.40, 
he  is  ordinarily  entitled  to  the  30  points  collected  for  him 
by  his  broker,  and  is  credited  with  this  amount;  Contract 
Differences  account  being  charged. 

Insurance  and  Interest  Charges 

There  are  other  minor  charges  in  connection  with  spot 
transactions,  such  as  insurance  and  interest,  and  a  small 
charge  for  the  storage  of  cotton  samples.  The  addition  of 
these  charges  consummates  the  deal. 

The  Spot  Register 

All  the  facts  pertaining  to  spot  cotton  transactions  must 
find  suitable  expression  in  some  record  arranged  to  show  at 
a  glance  all  details  in  connection  with  the  purchase  and  the 
subsequent  disposition,  either  by  delivery  against  a  futures 
sale  or  by  direct  shipment  to  the  customer.  Such  a  record 
is  the  "Spot  Register"  shown  in  Form  56. 


202 


COTTON    BROKERAGE 


low  middling,  the  discount  is  $.005  a  pound,  or  a  total  of 
$.035;  on  12  fully  low  middling,  the  discount  is  $.0085  a 
pound,  making  an  allowance  of  $.102;  on  48  low  middling 
at  $.0125  discount,  the  allowance  is  $.60;  on  23  strict  good 
ordinary  at -$.02  discount,  the  allowance  is  $.46;  and  on  1 
good  ordinary,  the  discount  is  $.03 ;  the  grand  total  being 
$1,227.  Now,  if  we  multiply  the  allowance  of  $1,227  by 
the  net  weight  of  49,470  pounds  (that  being  the  poundage 
to  be  considered),  and  divide  the  product  of  $60,699.69  by 
92  (the  number  of  bales  contained  in  the  contract),  we  will 
get  $659.78,  which  is  the  allowance  made  for  the  inferior 
grades. 

Storage  and  Labor 

The  charge  for  storage  and  labor  in  connection  with  the 
warehousing  of  cotton  is  sometimes  paid  by  the  seller  to  the 
storage  company  up  to  the  time  of  the  sale.  In  the  great 
majority  of  cases,  however,  the  storage  and  labor  charge  is 
allowed  to  accumulate  and  is  deducted  by  the  seller  from 
his  spot  bill  to  the  buyer.  The  charge  for  storage  is  20 
cents  a  bale  for  each  month,  and  10  cents  a  bale  for  half 
months.  The  cost  for  labor  is  10  cents  "in"  and  10  cents 
"out" ;  that  is,  20  cents  for  putting  the  cotton  in  storage  and 
taking  it  out.  The  "out"  storage  charge  is  paid  by  the 
buyer  when  he  releases  his  cotton  from  store,  while  the  "in" 
storage  is  allowed  by  the  seller.  In  the  case  of  the  cotton 
stored  May  26,  1915,  the  storage  and  labor  were  paid  by 
the  seller  up  to  May  26\  1915.  From  that  date  until  De- 
cember 31,  1915,  there  would  be  seven  full  months  of  storage 
at  20  cents,  and  one  half  month  at  10  cents,  or  $1.50  for 
each  bale.  On  92  bales,  therefore,  the  storage  allowance 
would  be  $138. 

The  total  charges  on  this  transaction  are  $6,145.78,  and 
the  total  allowances   for  grade,   storage,   and  labor  are 


SPOT    COTTON 


203 


%797.7^\  therefore  the  net  cost  of  the  contract  to  the  cus- 
tomer, as  shown  by  the  spot  bill,  is  $5,348. 

Customer's  Contract  Difference  Credit 

Let  us  recall  for  a  moment  the  $150  which  the  broker 
collected,  for  the  difference  of  30  points  between  the  pur- 
chase and  notice  prices.  What  interest  has  the  customer  in 
this  sum?  The  charge  to  him  should  be  on  the  basis  of 
12.10.  Therefore,  if  he  was  charged  on  the  basis  of  12.40, 
he  is  ordinarily  entitled  to  the  30  points  collected  for  him 
by  his  broker,  and  is  credited  with  this  amount;  Contract 
Differences  account  being  charged. 

Insurance  and  Interest  Charges 

There  are  other  minor  charges  in  connection  with  spot 
transactions,  such  as  insurance  and  interest,  and  a  small 
charge  for  the  storage  of  cotton  samples.  The  addition  of 
these  charges  consummates  the  deal. 

The  Spot  Register 

All  the  facts  pertaining  to  spot  cotton  transactions  must 
find  suitable  expression  in  some  record  arranged  to  show  at 
a  glance  all  details  in  connection  with  the  purchase  and  the 
subsequent  disposition,  either  by  delivery  against  a  futures 
sale  or  by  direct  shipment  to  the  customer.  Such  a  record 
is  the  "Spot  Register"  shown  in  Form  56. 


Part  III — Produce  Brokerage 


CHAPTER    XXVI 

PRODUCE   BROKERAGE— ITS   CUSTOMS   AND 

RECORDS 

Conditions  and  Customs 

Under  "Produce  Brokerage,"  such  transactions  will  be 
discussed  as  occur  on  the  New  York  Produce  Exchange 
and  the  Chicago  Board  of  Trade. 

Here,  as  in  cotton  brokerage,  two  markets  exist:  one 
in  which  spot  or  cash  transactions  appear;  the  other  deal- 
ing with  "futures."  It  may  be  said  with  safety  that  about 
75%  of  all  contracts  are  entered  into  for  "future  delivery." 
This  being  true,  it  becomes  quite  apparent  that  produce 
brokerage  will,  for  the  most  part,  concern  itself  with  the 
futures  operations.  It  is  therefore  this  phase  of  produce 
brokerage  accounting  that  is  treated  here. 

The  New  York  Produce  Exchange,  while  it  is  nomi- 
nally a  market  for  grain,  really  does  very  little  in  this 
line.  Occasionally,  however,  the  "Pit"  is  the  scene  of 
large  grain  operations.  The  most  prominent  commodities 
dealt  in  are  corn  and  wheat.  Barley,  rye,  and  oats  find  a 
better  market  on  the  Chicago  Board  of  Trade.  Concern- 
ing ourselves  chiefly  with  dealings  in  corn  and  wheat,  it 
is  of  importance  to  know,  first,  the  methods  of  trading, 
and  second,  the  accounting  necessary  to  record  the 
transactions. 

204 


ITS  CUSTOMS  AND  RECORDS 


205 


When  dealing  in  corn  or  wheat,  the  "contract,"  whether 
it  be  for  "spot"  or  for  "future"  delivery,  is  5,000  bushels. 
The  price  is  quoted  in  cents  and  fractions  of  a  cent  per 
bushel,  the  fluctuations  varying  by  eighths  or  multiples 
thereof.  Thus,  one  contract  of  May  wheat  purchased  at 
96  1/8  cents  per  bushel  will  cost  $4,806.25.  Occasionally,  a 
double  contract,  i.e.,  10,000  bushels,  is  traded  at  a  "Split" 
price.  For  instance,  if  10,000  May  corn  were  purchased 
at  the  split  price  of  66  3/4  —  7/8,  it  would  mean  that  5,000 
bushels  were  purchased  at  66  3/4  and  5,000  at  66  1 1"^. 

The  commission  on  grain,  according  to  the  laws  of  the 
New  York  Produce  Exchange,  is  $6.25  for  each  contract 
of  5,000  bushels  purchased  and  sold;  $3.12  1/2  on  the  pur- 
chase, and  a  similar  charge  on  the  sale. 

The  most  active  option  months  for  wheat  and  corn  are 
May,  July,  September,  and  December.  The  methods  of 
trading  are  very  much  the  same  as  those  in  vogue  on  the 
New  York  Cotton  Exchange.  The  only  difference  from 
the  accounting  standpoint  is  that  the  contracts  are  not 
settled  by  the  "point  differences"  system.  That  is  to  say, 
the  cost  of  the  contract  is  resolved  into  dollars  and  cents, 
and  the  difference,  loss  or  gain,  immediately  reflects  a 
dollars-and-cents  result. 

Transferable  notices  and  direct  settlements  operate  as 
a  means  of  settling  transactions  between  brokers.  "Ring- 
ing" is  seldom  resorted  to  as  a  matter  of  settlement,  for 
the  reason  that  the  clearing  house  system  works  along 
such  lines  that  ringing  becomes  unnecessary.  Nor  is  the 
Street  "let-out"  an  important  factor  of  settlement. 

Books  of  Account 

In  the  customers'  division  of  a  prouace  brokerage  con- 
cern, the  following  books  will  be  most  commonly  found 
to  record  transactions  in  grain  and  oil : 


206 


PRODUCE    BROKERAGE 


Purchases  and  sales  book 
Customers  margin  book 
Customers  contract  book 
Analysis  journal 
Customers  ledger 
General  journal 
Cash  book 
General  ledger 
Street  margin  ledger 

The  ruling,  arrangement,  and  uses  of  these  records  are 
identical  in  every  respect  with  those  of  the  corresponding 
books  used  in  the  cotton  business.  Comment  is  therefore 
unnecessary. 

The  Street  books  usually  employed  comprise  the 
following : 

Blotter 
Street  ledger 
Clearing  house  ledger 
Margin  book 

The  Blotter;  the  Street  Ledger 

After  the  transactions  are  made  on  the  "floor"  of  the 
Exchange,  the  customary  "sign-up  slips"  form  the  basis 
of  entry  for  the  blotter.  This  record  is  very  much  like 
the  blotter  of  the  cotton  brokerage  business. 

After  the  entry  in  the  blotter  is  completed,  this  question 
is  asked :  Is  the  broker  named  in  the  transaction  a  member 
of  the  New  York  Produce  Exchange  Clearing  Association? 
If  answered  in  the  affirmative,  then  the  transaction  is 
entered  in  the  clearing  house  ledger.  If  answered  in  the 
negative,  then  the  Street  ledger  becomes  the  second  book 
for  consideration. 

This  classification  of  brokers  is  necessary  for  the  reason 


ITS  CUSTOMS  AND  RECORDS 


207 


\ 


that  many  members  of  the  Exchange  have  no  membership 
in  the  Clearing  Association,  which  is  a  separate  institution 
from  the  Produce  Exchange  proper,  and  this  fact  bears 
directly  upon  the  entries  made  to  record  their  transactions. 

For  instance,  if  broker  A  should  purchase  5,000  bushels 
of  May  corn  from  broker  B — neither  of  them  a  member 
of  the  Clearing  Association — the  transaction  would  rest 
after  being  expressed  in  the  Street  ledger.  If,  by  chance, 
A  should  later  sell  to  B,  a  direct  settlement  could  be  effected. 
While  it  has  been  stated  that  the  ringing  method  is  not 
used  to  an  appreciable  extent,  it  is  nevertheless  true  that 
brokers,  such  as  A  and  B,  might  attempt  to  settle  trans- 
actions through  this  indirect  means.  This,  however,  is 
seldom  done.  It  is  very  obvious,  then,  that  transactions 
between  two  ex-clearing  house  brokers  are  carried  along 
until  the  "notice  day."  If  A,  using  the  same  illustration, 
should  receive  a  notice  from  B,  the  same  would  be  trans- 
ferred to  whomever  A  might  have  sold. 

Again,  if  in  the  preceding  transaction,  one  of  the  brokers 
had  clearing  house  privileges  and  one  had  not,  the  same 
method  of  entry  would  still  operate. 

The  Clearing  House  Ledger 

Transactions  between  clearing  house  members  assume 
an  entirely  different  aspect  as  far  as  entry  and  final  settle- 
ment are  concerned.  In  such  case  "sign-up  slips"  are  ex- 
changed and  the  entry  is  made  in  the  clearing  house  ledger. 
All  transactions  expressed  therein,  attest  to  the  fact  that 
the  items  have  been  cleared  by  the  Association. 

Inasmuch  as  the  volume  of  business  to  be  passed  through 
the  clearing  house  ledger  cannot  be  measured  definitely, 
it  is  best  kept  as  a  loose-leaf  device.  The  ruling  and  ar- 
rangement of  the  sheet  should  be  such  as  to  allow  for  the 
convenient  entry  of  the  date  of  the  transaction,  the  quan- 


208 


PRODUCE    BROKERAGE 


tity,  the  price,  and  the  broker  of  whom  bought.  The  sales 
division  of  the  record  should  provide  similar  information. 
In  the  Street  ledger  used  in  the  cotton  business,  several 
of  these  sheets  are  allotted  to  the  respective  Street  brokers, 
depending  altogether  upon  the  diversity  of  the  options 
bought  and  sold.  In  the  grain  market,  hov^ever,  all  trans- 
actions appear  as  though  the  Clearing  House  was  the  second 
broker,  handling  the  other  end  of  the  purchase  or  sale, 
and  the  folios  of  the  clearing  house  ledger  will  be  headed 
as  follows :  "Clearing  House  May  Corn,"  "Clearing  House 
July  Corn,''  "September  Corn,"  "July  Wheat,"  "September 
Wheat,"  etc.,  etc. 

This  arrangement  of  the  clearing  house  ledger  shows 
how  similar  the  relationship  of  the  clearing  house  to  the 
broker  is  to  that  which  exists  between  one  broker  and 
another  in  the  cotton  business,  and  between  two  ex-clearing 
house  members  of  the  Produce  Exchange.  The  Associa- 
tion must  answer  to  the  member  clearing,  and  vice  versa. 
One  member  cannot  proceed  against  another  on  clearing 
house  transactions.  As  soon  as  the  trade  is  accepted  by 
the  manager  for  clearance,  all  claims  are  to  be  registered 
against  the  clearing  institution.  In  a  word,  the  contractual 
relationship  between  two  clearing  house  members  is  severed 
as  soon  as  the  item  is  passed  through  the  Clearing  House. 

The  clearing  house  ledger  is  not  a  financial  book.  At 
best,  it  serves  the  purpose  of  tracing  purchases  and  sales, 
if  for  any  reason  a  review  becomes  necessary, 

Closing  the  Books 

The  closing  of.the  books  necessitates  adjustments  similar 
to  those  treated  under  "Cotton  Brokerage." 

The  income  statement,  balance  sheet,  and  "Margin 
Tables"  operate  on  the  principles  explained  heretofore 
(Chapter  XXIV). 


CHAPTER    XXVII 

PRODUCE    BROKERAGE— THE    CLEARING 

HOUSE   SYSTEM 

New  York  Produce  Exchange  Clearing  House  Association 
The  Clearing  House  Association  has  for  its  purposes: 

1.  The  settlement  of  purchases  and  sales  among  its 

various  members. 

2.  The  calling  of  original  and  market  margins  when- 

ever necessary. 

3.  The  final  receipt  and  delivery  of  all  notices. 

It  differs  in  every  respect  from  the  clearing  systems 
of  the  New  York  Cotton  and  Stock  Exchanges.  It  con- 
stitutes itself  as  intermediary  between  brokers  to  the  extent 
that  all  purchases  and  sales  are  in  effect  assigned  to  it, 
thereby  creating  an  actual  contract  relationship  between 
the  clearing  house  members  and  itself.  In  doing  this,  it 
becomes  liable  in  case  of  breach  of  contract.  To  protect 
itself  it  demands: 

1.  The  name  of  the  broker  with  whom  the  transaction 

was  made. 

2.  The  constant  adjustment  of  prices  arising  from  the 

daily  fluctuations,  payable  by  check  in  the  case 
of  a  market  loss,  and  receivable  by  a  draft  on 
the  Clearing  House,  where  any  market  profit  is 
shown. 

3.  The  calling  of  original  margins  within  twenty-four 

hours  of  the  time  in  which  transactions  have  been 
made. 

4.  The  calling  of  market  margins  between   10  a.m. 

and  3  p.m.,  to  adjust  any  differences  in  price 

209 


! 


210  PRODUCE    BROKERAGE 

which  might  exist  on  open  clearing  house  con- 
tracts by  reason  of  a  **wild"  market. 

Operation  of  the  Clearing  House  System 

Whenever  a  contract  is  made  between  two  clearing 
house  members,  both  are  required  to  file  a  sheet  with  the 
Association  before  10  o'clock  on  the  first  five  business  days 
of  the  week,  and  before  9 :30  o'clock  on  Saturdays.  Besides 
the  sheet,  statements  known  as  "Bought  Slips"  and  "Sold 
Slips"  (Forms  57  and  58)  must  be  filed. 

A  "Bought  Slip"  is  made  out  for  each  class  of  grain, 
i.e.,  corn  and  wheat.  The  information  contained  in  the 
"Bought"  and  also  in  the  "Sold"  slips  is  as  follows : 

1.  Date  of  purchase 

2.  Name  of  the  respondent  member 

3.  Name  of  broker  from  whom  purchased 

4.  Amount   (in  bushels) 

5.  Month  (for  instance,  May  corn) 

6.  Price 

7.  Settling  price  (clearing  house) 

8.  Debit  and  credit  columns  (in  which  are  stated  either 

the  loss  or  the  gain  between  the  cost  and  the 
clearing  house  settling  price) 

Taking,  to  illustrate  the  application  of  the  clearing  house 
settling  price,  the  purchase  of  10,000  May  corn  at  67  3/8, 
assume  that  67  1/8  is  the  clearing  figure  issued  by  the  Asso- 
ciation at  the  close  of  business  on  that  day.  On  this  trans- 
action the  purchasing  broker  would  be  called  upon  to  pay 
the  Clearing  House  the  sum  of  $25.  This  amount  would 
appear  in  the  "Debit"  or  loss  column  of  the  bought  slip. 

The  Clearing  House  Sheet 

Let  us  now  consider  the  clearing  house  sheet  proper 


THE    CLEARING    HOUSE    SYSTEM 


[i 


(Forms  59,  60).     It  has  six  main  divisions  arranged  as 
follows : 

1.  Contracts  "Carried  over  for  Tomorrow" 

2.  "Today's  Trading" 

3.  Contracts  "Carried  over  from  Yesterday" 

4.  "Settling  Price" 

5.  "Debit" 

6.  "Credit" 

The  first  column  is  further  subdivided  so  as  to  show: 
"Long,"  "Month,"  and  "Short." 

The  second  column  is  subdivided  into:  "Bought," 
"Month,"  and  "Sold." 

The  third  column  contains  information  similar  to  the 

first. 

The  fourth  column  is  subdivided  into:    "Yesterday" 

and  "Today." 

At  the  right-hand  bottom  of  the  sheet  there  will  be  found 
under  the  monetary  columns,  spaces  for  recording  any  losses 
or  gains  reflected  on  either  the  bought  or  sold  slips.  We 
also  find  that  the  sheet  is  subdivided  into  two  sections,  an 
upper  and  a  lower,  the  first  providing  for  wheat  trans- 
actions and  the  second  for  transactions  in  corn. 

To  illustrate,  let  us  suppose  that  the  purchase  of  10,000 
May  corn  has  been  entered  on  the  clearing  house  sheet. 
In  the  column  which  provides  for  "Today's  Trading,"  we 
find  under  the  corn  section  10,000  May  bought.  As  this 
trade  was  not  "Carried  over  from  Yesterday,"  it  is  to  be 
inferred  that  all  market  adjustments  were  made  on  the 
bought  slip. 

Next,  in  the  column  "Settling  Price"  the  clearing  figure 
will  appear  under  the  heading  "Today,"  and  under  the 
division  which  provides  for  the  transactions  "Carried  over 
for  Tomorrow,"  the  10,000  May  corn  will  appear  in  the 


i 


!i 


212 


PRODUCE    BROKERAGE 


"Long"  column.  In  the  monetary  columns  providing  for 
losses  or  gains,  as  reflected  by  the  bought  or  sold  slips, 
the  amount  of  $25  appears  as  a  debit  opposite  the  caption 
^'Bought  Sheet."  At  the  very  bottom  of  the  clearing  house 
sheet  these  words  appear: 

Our 


Your 


Check 


By  crossing  out  the  unnecessary  word,  we  indicate  whether 
payment  is  to  be  made  to  or  by,  the  Clearing  House.     In 
this  case  the  word  **Your"  is  stricken  out.     The  check  and 
the  bought  slip  would  accompany  the  sheet.    ( See  Form  59. ) 
Considering  the  sheet  of  the  next  day  (Form  60),  we 
find  in  the  column  headed  "Carried  over  from  Yesterday," 
10,000  May  corn.     If  no  additional  purchases  or  sales  are 
made,   the   same  transactions   are   carried  to  the   column 
headed  ''Carried  over  for  Tomorrow."    Let  us  assume  here 
that  the  clearing  house  price  of  the  second  day  was  65. 
In  the  "Yesterday"  column  the  price  of  settlement  appears 
as  67  1/8.     In  order  to  adjust  the  contracts  to  the  market 
price,  the  settling  price  of  "Today"  is  stated  on  the  sheet. 
The  difference  between  yesterday's  price  of  67  1/8  and  to- 
day's price  of  65  results  in  a  market  loss  of  2  1/8  points  on 
10,000  bushels,  or  $212.50.     A  check  is  drawn  by  the  pur- 
chasing broker,  payable  to  the  Clearing  House  Association, 
and  the  sheet  is  deposited. 

Clearing  House  Adjustments 

All  payments  and  receipts  pertaining  to  clearing  house 
adjustments  are  charged  and  credited  to  the  account  called 
"Contract  Differences— Grain— Clearing  House." 

Clearing  House  and  Customers'  Settlements 

The  next  point  for  consideration  is  the  relation  which 
such  clearing  house  payments  and  receipts  bear  to  the  settle- 


THE    CLEARING    HOUSE    SYSTEM 


213 


ments  in  customers'  accounts  arising  from  purchases  and 
sales.  If  a  customer  purchased  10,000  May  wheat  at  92  1/8 
and  sells  these  contracts  at  94,  he  will  realize  a  gross  profit 
■  of  1  7/S  points,  or  $187.50.  The  customer  will  receive  credit 
for  his  net  profit,  and  the  account  of  "Contract  Differences 
— Grain"  will  be  charged  with  the  gross  amount.  Assume 
the  purchase  and  sale  to  have  been  made  through  clearing 
house  brokers  on  February  3  and  February  6,  respectively. 
How  would  the  daily  adjustments  of  settling  prices  affect 
these  transactions?  If,  on  the  day  of  purchase  the  settle-  ■ 
ment  figure  were  91,  a  payment  of  $112.50  would  be  made 
to  the  Clearing  House  by  10  o'clock  a.m.  on  February  4. 
If  the  settlement  price  on  February  4  were  93  1/8,  a  draft 
on  the  Clearing  House  would  be  made  for  $212.50,  or 
the  difference  between  yesterday's  figure  and  today's.  On 
February  5  the  settlement  price  was  92  1/2,,  and  again  a 
payment  to  the  Association  of  $62.50  would  be  necessary 
as  an  adjustment  of  prices. 

On  February  6,  the  10,000  May  wheat  were  sold  at  94. 
At  this  juncture  a  sold  slip  would  attest  to  the  sale.  The 
settlement  figure  would  be  applied  on  the  sold  slip.  Let 
us  assume  that  93  5/8  was  the  clearing  house  price.  The 
sale  having  been  made  at  94,  and  the  price  necessary  to 
bring  the  contract  to  the  closing  figure  being  93  5/8,  the  sum 
of  $37.50  would  be  carried  out  into  the  credit  column  of 
the  sold  slip.  To  the  extreme  right  of  the  clearing  house 
sheet,  opposite  the  caption  "Sold  Sheet,"  $37.50  would  be 
reflected  in  the  "Credit"  column.  We  must  remember, 
however,  that  "Today's"  settling  price  is  not  as  yet  applied 
to  the  contract  appearing  on  the  sheet  proper.  If  the 
settling  price  of  "Yesterday"  (the  5th)  were  92  1/2,  and 
"Today's"  figure  93  5/8,  an  additional  credit  of  $1 12.5a 
would  result  in  a  draft  being  made  upon  the  Clearing  House 
for  $37.50  plus  $112.50,  or  a  total  of  $150.    Now  if  we  re- 


I 


».  ij 

.     i  ■ 

I 


m 


214  PRODUCE    BROKERAGE 

view  the  payments  to  and  from  the  Clearing  House,  we  will 
find: 

Payments : 

Februarys $112.50 

"        5 62.50 

Total  $175.00 

Receipts  : 

February  4 $212.50 

6 150.00 

'T^^tal  $362.50 

The  difference  between  payments  and  receipts  is  $187.50. 
This  amount  appears  to  the  credit  of  the  Contract  Differ- 
ences—Grain—Clearing  House  account.  The  gross  profit 
on  the  settlement  by  the  customer  was  $187.50.  The  Con- 
tract Differences— Grain  account  was  charged  with  a  like 
sum.  Thus  the  relation  of  the  daily  clearing  house  adjust- 
ments to  the  final  liquidation  of  customers'  contracts  becomes 
apparent.  If  at  this  point  the  business  were  dissolved,  the 
Contract  Differences  accounts  would  be  merged  and  the 
result  would  be  a  settled  account. 

Proof  of  Contract  Differences— Grain  Account 

In  order  to  prove  that  the  transactions  liquidated  by 
customers  have  resulted  in  proper  charges  and  credits  to 
their  accounts,  and  in  order  to  ascertain  the  correctness 
of  outstanding  contracts,  a  proof  is  taken  at  the  close  of 
each  month's  operations.  The  balance  in  the  Contract  Dif- 
ferences—Grain account  should  be  possible  of  reconciliation 
after  the  balance  which  exists  in  the  Contract  Differences- 
Grain— Clearing  House  account  and  the  open  contracts  with 
the  Clearing  House,  are  applied.    Let  us  suppose  that  the 


THE    CLEARING    HOUSE    SYSTEM 


215 


debit  in  the  Contract  Differences — Grain  account  is  $50), 
resulting  from  the  purchase  of  5,000  bushels  of  May  wheat 
at  94  and  the  sale  of  5,000  bushels  at  95,  and  that,  accord- 
ing to  the  customers'  books,  there  are  still  on  hand  5,000 
bushels  of  May  corn  "long"  at  67  and  5,000  bushels  of 
July  corn  "short"  at  69.  Taking  the  settling  prices  of  the 
night  previous,  we  find  that  the  5,000  bushels  of  May  corn 
were  adjusted  to  the  market  price  of  68  1/4;  that  the  5,000 
bushels  of  July  corn  short  also  appear  at  70  3/8,  that  being 
the  settling  figure.  As  a  result  of  the  differences  between 
the  actual  price  of  the  May  corn  and  the  settling  price,  and 
the  actual  sales  price  of  the  July  corn  in  comparison  with 
its  settling  figure,  a  debit  of  $6.25  appears  in  the  Contract 
Differences— Grain— Clearing  House  account.  It  will  be 
recalled  that  the  sum  of  $50  had  been  received  from  the 
Clearing  House  against  the  liquidated  purchase  of  5,000 
May  wheat  at  94  and  the  subsequent  sale  at  95.  Hence, 
three  factors  will  be  introduced  to  prove  the  accuracy  of 
the  Contract  Differences — Grain  account : 

1.  The  unliquidated  contracts  of  customers. 

2.  The  unliquidated  contracts  as  they  appear  upon  the 

sheet. 

3.  The  payments  to,  and  the  receipts  from,  the  Clearing 

House. 

,6.-, 

1.  Resolving  the  unliquidated  contracts  of  customers  into 
dollars  and  cents,  we  find  that  5,000  May  corn  at  67  equals 
$3,350,  a  debit;  the  5,000  July  corn  short  at  69  equals 
$3,450,  a  credit.  At  this  point  we  construct  a  "dummy" 
Contract  Differences— Grain  account,  recording  on  the 
credit  side  $3,450,  and  on  the  debit,  $3,350. 

2.  The  items  still  open  with  the  Clearing  House  are 
5,000  May  corn  long  appearing  at  the  last  settling  figure 
of  68  1/4.    Resolving  this  into  dollars  and  cents,  the  con- 


I 
I 


2l6 


PRODUCE  BROKERAGE 


tract  would  amount  to  $3,412.50,  which  in  the  "dummy" 
account  is  to  be  listed  under  the  credits.  The  5,000  July 
corn  *'short"  with  the  Clearing  House,  figured  at  the  set- 
tling price  of  70  3/8,  amounts  to  $3,51875.  This  sum  is  to 
be  treated  as  a  debit  in  the  "dummy''  account. 

3.  Turning  for  a  moment  to  the  Contract  Differences — 
Grain— Clearing  House  account,  we  find  a  credit  of  $50 
and  a  debit  of  $6.25,  or  a  net  credit  of  $4375.  This  sum 
is  to  be  treated  in  the  dummy  account  as  a  debit.  Then 
on  the  debit  side  the  following  items  appear: 

$3,350.00 

3,518.75 

43.75 


or  a  total  of  $6,912.50 
And  on  the  credit  side  items  for  : 

$3,450.00 
3,412.50 


or  a  total  of  $6,862.50 

After  footing  the  debit  and  credit  columns  of  the  dummy 
account,  the  balance  is  a  debit  of  $50  which  supports  the 
balance  in  the  Contract  Differences— Grain  account. 

The  difference  of  $50  between  the  two  totals  of  the 
dummy  account  is  proof  positive  that  all  transactions  of 
customers  have  been  properly  liquidated ;  that  all  payments 
to  and  receipts  from  the  Clearing  House  are  correct ;  and 
that  the  unliquidated  contracts  agree  as  to  quantity  and 
price. 


CHAPTER    XXVIII 

MARGINS 

Original  Margins 

In  a  general  way  the  customs  and  practices  of  the  New 
York  Produce  Exchange  are  discussed  in  the  present 
chapter.  Between  two  ex-clearing  house  members  in  any 
transaction,  the  right  is  reserved  by  either  one  to  demand 
original  margin  on  contracts  in  wheat  or  corn,  up  to  5  cents 
per  bushel,  or  $250  for  the  contract.  The  call  must  be 
made  within  24  hours  from  the  time  of  the  transaction. 

All  transactions  cleared  by  the  Association  are  also 
subject  to  original  margin  call.  The  manager  of  the  Clear- 
ing House  issues  all  calls,  and  the  margin  when  deposited 
is  made  payable  to  the  broker  responding,  or  to  the  Clearing 
Association  of  the  New  York  Produce  Exchange,  as  the 
Secretary  shall  direct.  The  original  margin  requirements 
in  a  normal  market  are  1  cent  a  bushel  on  contracts  long 
or  short  up  to  250,000  bushels ;  1  1/2  cents  a  bushel  on  longs 
or  shorts  from  250,000  to  500,000  bushels ;  and  2  cents  a 
bushel  on  longs  or  shorts  of  500,000  or  over.  When,  in 
the  opinion  of  the  directors  of  the  Exchange,  the  market 
is  abnormal,  the  margin  requirements  may  be  greater. 

Where  a  member  is  long  of  100,000  May  corn  and  short 
of  50,000  July  wheat,  he  is  said  to  have  a  "spread"  on 
50,000  bushels.  In  that  case  the  Association  would  require 
1  cent  a  bushel  on  the  50,000  net  long,  and  1/2  cent  a 
bushel  on  the  spread  of  50,000  bushels.  On  spreads  under 
100,000  bushels,  an  original  margin  of  1/2  cent  is  demanded. 
On  spreads  of  100,000  or  over,  1  cent  a  bushel  is  the 

217 


2l8 


PRODUCE    BROKERAGE 


required  margin.  The  requirements  may,  however,  be  in- 
creased or  decreased  upon  short  notice,  to  conform  to 
market  conditions. 

Market  Margins 

Brokers  without  clearing  house  affiliations  may  call  and 
may  be  called  for  market  margin.     Where  there  exists  a 
difference  between  contract  and  market  price,  the  broker  in 
whose  favor  the  market  is  "working'*  may  demand  the 
deposit  of  a  sufficient  sum  to  margin  the  open  contracts 
Whenever  a  contract  is  entered  into  between  a  clearing 
house  broker  and  one  without  such  special  membership  the 
case  remains  the  same.    Market,  and  even  original  margin 
must  be  deposited  upon  call.     The  difference  between  the 
two  IS  simple.     When  original  margin  is  required,  both 
brokers  must  deposit,  but  in  the  case  of  market  margin 
only  the  person  suffering  from  market  loss  must  deposit 
Ihis  is  similar  to  the  custom  on  the  Cotton  Exchange 

One  of  the  rights  of  the  Clearing  House  Association  is 
to  call  Its  members  for  market  margin  whenever  such  call 
becomes  necessary  by  reason  of  a  wildly  fluctuating  market. 
Ot  course,  the  settling  prices  of  the  day  would  operate  as 
an  adjustment  between  the  preceding  da/s  settling  price 
and  the  following  day.  But,  conceive  of  a  condition  where 
the  market  breaks  very  sharply,  directly  after  the  sheet  of 
the  previous  day  has  been  deposited,  and  suppose  that  the 
broker  is  heavily  long  of  corn  or  wheat.  The  Association 
must  seek  temporary  protection,  and  to  that  end  issues  a 
call  specifying  the  amount  of  market  margin  to  be  paid 
The  call  is  answered  by  paying  the  amount  to  the  Asso- 
ciation. When,  however,  the  settling  prices  for  the  day 
m  question  have  been  determined  upon,  the  broker  who 
has  been  called  for  market  margin  during  that  day,  may 
treat  such  margin  deposit  as  a  credit  on  the  sheet.    In  such 


MARGINS 


219 


case  after  the  adjustments  ol  settling  prices  have  been  made, 
the  final  result  is  either  added  to,  or  subtracted  from,  the 
credit  appearing  by  reason  of  margin. 

To  illustrate,  suppose  that  the  market  margin  deposited 
upon  call  of  the  Association  was  $2,000,  and  that  after 
today's  settling  price  has  been  applied  to  the  long  con- 
tracts, a  loss  of  $800  is  reflected;  then  a  draft  for  $1,200 
would  be  made  upon  the  Clearing  House. 

From  this  it  will  be  seen  what  adequate  measures  of 
protection  have  been  adopted  by  the  Association.  In  case  a 
broker  fails  to  respond  to  a  margin  call  immediately,  a  con- 
dition of  insolvency  may  be  suspected  and  the  Association 
exercises  the  right  to  close  out  all  the  commitments  repre- 
sented by  the  sheet.  If  any  loss  to  the  Association  should 
result  from  the  insolvency  of  a  member,  it  is  liquidated  by 
the  disposal  of  the  stock  which  each  member  holds  in  the 
Association.  His  seat  on  the  Exchange  is  also  lost  to  the 
insolvent  member. 

Margin  Details 

All  original  and  market  margins  called  by  non-clearing 
house  members  are  depositable  within  a  reasonable  time 
after  the  call  las  been  received.  Such  margin  is  made  pay- 
able to  any  one  of  the  designated  banks  or  trust  companies 
and  is  deposited  with  the  Secretary  of  the  Exchange.  He 
acts  in  the  same  capacity  as  does  the  Superintendent  of 
the  Cotton  Exchange.  Interest  at  the  rate  of  2  to  3%  is 
allowed  by  the  depository. 

Release  of  Margins 

"Original"  margins  may  be  released  after  the  contracts 
are  settled  between  brokers ;  market  margins  are  releasable 
when  the  market  price  again  approximates  the  contract 
price. 


'fi 


220 


PRODUCE    BROKERAGE 


•il 


In  the  case  of  Association  brokers,  the  margin  (all  being 
original)  is  releasable: 

1.  After  the  contract  is  liquidated  on  the  sheet  by  pur- 
chase or  sale. 

2.  As  to  the  excess  margin,  whenever  any  additional 
sale  or  purchase  creates  a  "spread."  For  instance,  if  a 
broker  were  long  of  250,000  May  corn,  he  would  be  re- 
quired to  deposit  original  margin  of  $2,500  (1  cent  per 
bushel).  If  he  should  subsequently  sell  250,000  May  corn, 
all  the  original  could  be  released.  But,  if  instead  of  selling 
250,000  May  corn,  his  customers  should  sell  only  100,000, 
then  only  $1,000  could  be  released,  representing  the  excess 
original  margin.  Or,  if  a  broker  were  long  of  75,000  July 
wheat,  he  would  be  required  to  deposit  $750  as  original 
margin.  If  eventually  he  should  decide  to  sell  75,000  July 
corn,  thus  creating  a  "spread,"  he  could  release  $375  in 
original  margin  for  the  reason  that  the  requirements  are 
only  one-half  cent  per  bushel  on  "spreads"  under  100,000. 


CHAPTER    XXIX 

CHICAGO    BOARD    OF   TRADE   BROKERAGE 

The  Chicago  Board  of  Trade 

Many  Wall  Street  concerns  have  memberships  on  the 
Chicago  Board  of  Trade.  By  being  so  affiliated,  they  may 
send  orders  to  their  Chicago  correspondents  for  execution 
and  in  that  way  earn  one-half  the  commission  charged  on  all 
Chicago  transactions.  That  is,  without  incurring  any  of 
the  expense  of  clearing  their  own  purchases  and  sales,  a 
secondary  commission  is  enjoyed  by  them. 

On  the  Chicago  market,  the  following  commodities  are 
listed  for  active  trading : 

1.  Grain — comprising  corn,  wheat,  oats,  rye,  and  barley. 

2.  Provisions — embracing  pork,  ribs,  and  lard. 

A  cash  market  and  a  futures  market  are  operated.  Most 
of  the  business  which  is  directed  to  Chicago  by  New  York 
brokers  falls  under  the  second  division,  namely,  that  of  the 
futures  market. 

It  is  not  intended  here  to  discuss  the  accounting  on  the 
Chicago  broker's  books,  but  the  treatment  of  Chicago  pur- 
chases and  sales  from  the  New  York  broker's  standpoint. 

The  Grain  Market 

The  methods  of  trading  on  the  Chicago  Board  of  Trade 
are  ve  similar  to  those  in  vogue  on  the  New  York  Produce 
Excha.  e.  Wheat,  oats,  corn,  rye,  and  barley  are  bought 
and  sold  by  contract.  Each  contract  contains  5,000  bushels. 
The  price  is  quoted  in  cents  and  fractions  of  a  cent  ranging 
from  one-eighth  to  seven-eighths.      A  fluctuation  of  one- 

221 


222 


PRODUCE    BROKERAGE 


eighth  is  equivalent  to  $6.25  on  each  contract.  Sometimes  a 
"double  contract"  consisting  of  10,000  bushels  is  traded  at 
a  "split"  price. 

The  commission  charged  on  a  purchase  and  sale  com- 
bined is  $7.50  for  each  contract  of  wheat,  corn,  and  oats. 
On  transactions  in  rye  and  barley,  the  commission  is  $12.50 
for  the  combined  purchase  and  sale ;  $6.25  for  the  purchase, 
and  a  like  charge  on  the  sale. 

Provisions 

The  purchase  or  sale  of  250  barrels  of  pork  is  one  con- 
tract. The  price  is  quoted  in  so  many  dollars  and  cents  per 
barrel.  The  fluctuations  are  2  1/2  cents  apart.  To  illus- 
trate, assume  the  purchase  of  250  barrels  of  pork  at  $19.50. 
The  next  variation  would  be  either  $19.47  1/2  or  $19.52  1/2. 
In  the  upward  trend,  the  fluctuations  would  range  as  fol- 
lows: $19.50,  19.52  1/2,  19.55,  19.57  1/2,  19.60,  etc. 
Each  variation  is  equivalent  to  $6.25.  The  commission  is 
$6.25  on  the  purchase  and  $6.25  on  the  sale;  a  total 
brokerage  of  $12.50. 

A  contract  in  ribs  equals  50,000  pounds.  The  price  is 
quoted  in  cents  and  hundredths  of  a  cent  per  pound.  The 
fluctuations  are  2  1/2  points.  Each  change  in  price  is 
equivalent  to  $12.50.  The  commission  is  one-eighth  of  one 
per  cent,  or  $12.50  on  the  "round"  transaction. 

Each  contract  in  lard  contains  250  tierces.  Each  tierce 
is  of  the  approximate  weight  of  340  pounds,  or  85,000 
pounds  to  the  contract.  The  price  is  quoted  in  cents  and 
hundredths  of  a  cent  per  pound.  The  fluctuations  are  of  the 
range  of  2  1/2  points,  or  $21.25  on  one  contract.  The 
commission  charge  is  $15. 

Commissions  Charged  New  York  Members 

The  New  York  members  who  have  occasion  to  use  this 


BOARD  Ol^  TRADE  BROKERAGE 


223 


market  are  charged  a  commission  of  $3.75  for  wheat,  corn, 
and  oats ;  $6.25  for  rye  and  barley ;  $6.25  on  ribs,  $6.25  on 
pork,  and  $7.50  on  lard  transactions. 

Accounting  for  Chicago  Trades 

No  books  of  account  other  than  those  kept  for  the  general 
business,  are  necessary  to  record  the  New  York  broker's 
Chicago  transactions.  To  illustrate,  suppose  that  Charles 
Fairfield  &  Co.,  members  of  the  Chicago  Board  of  Trade, 
direct  their  orders  in  Chicago  futures  through  Long  &  Bar- 
nett  of  Chicago.  The  latter  concern  attends  to  the  clearing 
of  the  contracts,  the  margins,  and  settlements.  In  other 
words,  they  literally  carry  the  commitments  until  finally 
closed. 

A  page  similar  to  that  used  for  recording  customers' 
purchases  and  sales  in  cotton,  will  answer  the  purpose  in 
expressing  all  transactions  in  Chicago  futures  contracted  for 
by  New  York  customers.  Thus,  if  customer  A  purchased 
5,000  bushels  of  Chicago  May  corn  at  67  1/2,  one  column 
under  A's  contract  folio  would  be  headed  "May  Corn 
Chicago"  and  all  transactions  therein  be  treated  in  the  same 
manner  as  are  cotton  contracts.  To  evidence  the  purchase 
through  the  Chicago  brokers,  a  column  under  Long  &  Bar- 
nett's  contract  page  would  reflect  the  transaction.  But  in 
this  case  the  contract  would  be  listed  in  the  column  for  sales. 
In  effect  it  would  be  made  to  appear  that  Long  &  Barnett 
had  sold  to  Fairfield  &  Co.,  5,000  May  corn  at  67  1/2. 
When  the  customer  sells,  an  account  sales  is  rendered  show- 
ing the  gain  or  the  loss,  and  the  result  is  entered  in  the 
journal.  The  general  journal  is  more  commonly  used  in 
connection  with  such  entries. 

Assume  that  the  sale  by  A  was  made  at  69  1/2,  thereby 
realizing  a  gross  profit  of  $100.  The  entry  would  appear  as 
follows : 


224  PRODUCE    BROKERAGE 

Debit  Long  &  Barnett. . . .  $96.25 

Credit  Customer  A 92.50 

Credit  Grain  Commission. .       3.75 

A  statement  of  the  trade  would  be  received  from  Long  & 
Barnett,  attesting  to  the  accuracy  of  the  settlement,  and  in 
their  contract  account  the  sale  would  be  reflected  as  though 
a  purchase  had  been  made  by  them  of  5,000  May  corn  at 
69  1/2. 

The  same  procedure  is  followed  in  other  grain  and  pro- 
vision settlements. 

No  "point  balance"  is  necessary,  owing  to  the  fact  that 
the  unliquidated  contracts  carried  by  the  resident  broker  are 
confirmed  at  the  close  of  each  month,  showing  the  quantity 
and  price  of  all  open  commitments.  The  accuracy  of  the 
settled  options  is  verified  by  the  account  sales  received  during 
the  period. 

On  the  "Income  Statement"  the  commission  realized 
from  Chicago  business  is  treated  as  income  from  operation. 


CHAPTER    XXX 

COTTONSEED-OIL    AND    COFFEE    BROKERAGE 


COTTONSEED-OIL    BROKERAGE 

The  New  York  Produce  Exchange  is  the  world's  market 
for  cottonseed-oil  and  its  by-products.  A  contract  in 
cottonseed-oil  contains  100  barrels  of  400  pounds  each,  or  in 
the  aggregate  40,000  pounds.  Prices  are  quoted  in  cents 
and  one-hundredths  of  a  cent  per  pound.  A  fluctuation  of 
1/100  is  known  as  a  point.  A  point  equals  $4  on  each  con- 
tract. The  commission  is  $15  to  non-members  for  the 
purchase  and  sale— $7.50  either  way.  The  Clearing  Asso- 
ciation, discussed  in  Chapter  XXVII,  attends  to  the  settle- 
ment of  all  transactions.  The  same  methods  are  employed 
in  the  settlement  of  oil  as  in  clearing  grain  contracts. 

Original  margin  is  demanded  on  purchases  or  sales. 
The  requirements  are  $1.50  per  barrel,  long  or  short,  and  50 
cents  per  barrel  on  "spreads."  As  between  non-associate 
members,  original  and  market  margins  are  required  in  the 
customary  way.  The  same  holds  true  wherever  an  asso- 
ciate member  has  dealings  with  a  broker  without  such  con- 
nection. 

The  losses  and  gains  of  customers,  arising  out  of  oil 
transactions,  are  recorded  in  an  account  known  as  "Contract 

Differences— Oil." 

All  payments  and  receipts  from  the  Association  are 
charged  and  credited  to  the  account  of  "Contract  Differences 
— Oil — Clearing  House." 

The  "point  balance"  operated  in  the  cotton  business 
could  be  employed  with  equally  good  results  in  verifying  the 
balance  appearing  in  the  Contract  Differences — Oil  account. 

The  commission  which  is  earned  as  a  result  of  the  trans- 

225 


226 


PRODUCE    BROKERAGE 


actions  in  cottonseed-oil  constitutes  primary  income  and  is 
to  be  treated  in  that  manner  on  the  "Income  Statement." 

COFFEE    BROKERAGE 

In  rounding  out  the  subject  of  brokerage  accounting, 
the  business  of  the  ''Coffee  Futures"  market  will  be  discussed 
briefly. 

One  contract  in  coffee  is  250  bags,  each  bag  being  of  the 
approximate  weight  of  130  pounds.  The  contract,  there- 
fore, contains  32,500  pounds.  The  price  is  quoted  in  cents 
and  hundredths  of  a  cent  per  pound.  One  one-hundredth 
is  known  as  a  point.  A  fluctuation  of  one  point  equals  $3.25 
on  the  contract.  The  commission  to  non-members  is  $20 
on  the  complete  transaction — purchase  and  sale. 

The  majority  of  the  produce  concerns  have  memberships 
on  the  Exchange.  No  additional  books  of  account  are  nec- 
essary in  the  accounting  department  to  record  transactions  in 
coffee.  The  only  additional  "Street"  records  required  are 
a  Street  ledger  and  margin  book. 

As  the  Coffee  Exchange  conducts  no  clearing  house,  all 
contracts  are  usually  carried  until  "tender"  day,  at  which 
time  they  are  settled. 

Under  such  conditions  it  becomes  necessary  for  brokers 
to  call  each  other  for  original  and  market  margins,  thereby 
protecting  themselves  against  loss.  The  original  margin 
requirements  are  $1  on  each  bag,  or  $250  on  the  contract. 
All  margin  checks  are  made  payable  to  one  of  the  designated 
banks,  and  are  deposited  with  the  Secretary  of  the  Exchange. 

From  the  standpoint  of  the  customer,  the  usual  margin  is 
$500  per  contract.  As  the  market  in  coffee  is  subject  to 
great  fluctuation,  this  margin  is  considered  conservative. 

The  commission  resulting  from  coffee  transactions  is 
credited  to  a  separate  commission  account,  but  is  included  as 
primary  income  on  the  statement  of  income. 


Part  IV — Brokerage  Auditing 


CHAPTER    XXXI 

AUDIT   OF    STOCK   BROKERAGE   BOOKS 

m 

Purposes  of  Audit 

The  auditing  of  stock  brokers'  books  is  a  new  departure 
for  the  accountant.  While,  by  reason  of  the  technical 
knowledge  which  such  an  undertaking  imposes,  very  little 
can  be  accomplished  without  a  thorough  knowledge  of 
Wall  Street  technique,  the  accountant  must  recognize  that 
there  is  as  much  need  for  an  audit  of  the  "Street's"  records 
as  there  is  for  the  examination  of  records  in  any  other 
line  of  commercial  endeavor. 

At  this  point  the  following  extract  from  the  report  of 
Governor  Hughes'  Committee  on  Speculation  in  Securities 
and  Commodities  (1909)  will  be  of  interest  as  indicating 
the  position  of  the  Hughes'  Commission  on  periodic  audits : 

"Failures  and  examination  of  books:  The  advisability 
of  requiring  by  State  authority  an  examination  of  the  books 
of  all  members  of  the  Exchange  analogous  to  that  required 
of  banks,  is  urged  upon  us.  Doubtless  some  failures  would 
be  prevented  by  such  a  system  rigidly  in  force,  although 
bank  failures  do  occur  in  spite  of  the  scrutiny  of  examiners. 
Yet  the  relations  between  brokers  and  their  customers  are 
of  so  confidential  a  nature  that  we  do  not  recommend 
an  examination  of  their  books  by  any  public  authority. 
The  books  and  accounts  of  members  of  the  Exchange  should, 
however,  be  subjected  to  a  periodical  examination  and  in- 
spection pursuant  to  rules  and  regulations  to  be  prescribed 

22J 


. 


228 


BROKERAGE    AUDITING 


by  the  Exchange,  and  the  result  should  be  promptly  reported 
to  the  Governors  thereof." 

Granting,  then,  the  necessity  for  periodic  examinations 
of  the  brokers'  books,  what  should  an  audit  of  brokerage 
records  show?  Ordinarily,  it  should  result  in  a  report  by 
the  accountant,  commenting  upon  the  financial  condition 
of  the  client,  passing  upon  the  correctness  of  the  financial 
statements,  and  construing  such  of  the  financial  reports 
as  focus  the  operations  of  the  period  under  review.  Robert 
H.  Montgomery*  gives  the  general  purposes  of  an  audit 
as  follows: 

*To  ascertain  the  actual  financial  condition  and  earnings 
of  an  enterprise  for : 

(a)  Its  proprietors  (partners  or  stockholders). 

(b)  Its  executives  (managers,  officers,  or  directors). 

(c)  Bankers  or  investors  .... 

(d)  Bankers  who  are  considering  the  discounting  or 

purchasing  of  its  promissory  notes." 

and  to  detect: 

"Errors  of  principle 
Clerical  errors 
Errors  of  omission 
Errors  of  commission 
OflFsetting  errors" 

With  the  purposes  of  an  audit  thus  well  defined,  let 
us  consider  the  usefulness  of  such  an  examination  to  the 
broker.  First,  it  will  serve  his  interest  by  giving  him  a 
comprehensive  and  intelligent  statement  of  his  business,  its 
earnings  and  financial  status.  Second,  it  will  help  him  in 
the  future  administrative  conduct  of  his  business.     Third, 

•In  "Auditing,  Theory  and  Practice,"  pages  10,  15. 


STOCK    BROKERAGE    BOOKS 


229 


!' 


i 


the  result  of  an  audit  will  help  him  materially  in  procuring 
better  banking  consideration. 

Also,  it  may  be  said  that  there  is  a  satisfaction  to  be 
enjoyed  in  the  knowledge  which  an  audit  gives,  that  no 
irregularities  are  occurring.  In  the  brokerage  business  the 
possibilities  of  peculation  are  great.  "Money"  is  the  only 
commodity  handled,  and  when  this  is  considered  there 
should  be  no  doubt  as  to  the  expediency  of  periodic  in- 
spections by  a  competent  person,  or  as  to  the  value  of  a 
statement  from  him  certifying  to  the  condition  of  the 
business  and  to  the  correctness  of  its  operations. 

Before  proceeding  further,  the  point  should  be  em- 
phasized that  an  audit,  whether  made  at  the  instance  of 
an  Exchange,  a  partner,  or  a  customer,  should  not  be 
superficial;  it  should  be  intensely  scrutinizing.  More  than 
once  have  accounts  been  passed  over  whose  very  con- 
struction should  have  elicited  profound  questioning  by  the 
auditor.  The  accounts  spread  upon  the  broker's  books  are 
too  crowded  with  values  to  allow  of  a  perfunctory  handling. 

Scope  of  Audit 

The  scope  of  a  Wall  Street  audit  is  the  next  important 
matter.  What  does  it  call  for?  Is  it  to  be  a  periodic 
audit?  Is  it  to  be  a  thorough  examination,  or  an  inspec- 
tion of  one  particular  account?  What  should  the  audit 
of  the  securities  department  embrace?  The  answer  to 
these  questions  will  depend  somewhat  upon  the  nature  of 
the  business — whether  it  is  a  Stock  Exchange  concern  or  a 
commodity  broker.  The  following  outline  of  audit  require- 
ments calls  for  a  thorough  examination  of  a  concern  with 
memberships  on  all  the  important  Exchanges. 

Such  an  audit  should  embrace: 

1.  The  verification  of  cash— petty  and  general. 


230 


2. 

3. 


7. 


8. 


9. 

10. 

11. 


12. 


BROKERAGE    AUDITING 

The  proof  of  correctness  for  stock  accounts  re- 
ceivable, long  of  securities. 

The  verification  of  accounts  receivable  having  no 
equity  in  securities,  but  representing  for  the  most 
part  credit  advances  to  customers  for  the  pur- 
pose of  investment  and  speculation — open  debits 
which  are  considered  perfectly  collectible. 

The  examination  of  notes  receivable  lodged  with 
the  broker. 

The  ascertainment  of  the  sufficiency  of  margins  on 
all  commitments  in  the  market. 

The  physical  examination  of  securities  in  the 
broker's  possession  representing  the  purchases  of 
customers  on  a  marginal  basis. 

The  physical  examination  of  securities  which  the 
broker  is  holding  for  safe-keeping  for  his  cus- 
tomers. 

The  confirmation  with  brokers  in  the  Street  of  any 
loans  made  on  collateral  by  the  client,  paying 
especial  attention  to  the  nature  and  adequacy  of 
the  collateral  in  the  loan,  the  interest  rates,  and 
the  duration  of  the  loan — whether  on  time  or 
demand — and  if  on  time,  whether  for  30  or  60 
days,  or  for  a  longer  period. 

The  examination  of  securities  owned  by  the  broker 
and  the  place  of  deposit. 

The  depreciation  of  such  securities. 

The  item  of  "Furniture  and  Fixtures,'*  with  par- 
ticular attention  to  the  matter  of  depreciation 
and  whether  any  capital  assets  of  this  class  have 
been  charged  to  income.  This  error  when  com- 
mitted is  usually  due  to  the  laxity  of  affairs  and 
the  total  ignoring  of  proper  accounting  principles. 

As  many  brokers  also  do  a  banking  business,  they 


STOCK    BROKERAGE    BOOKS 


231 


frequently  have  their  own  buildings,  upon  which 
taxes  are  payable  and  upon  which  depreciation 
and  reserves  are  to  be  allowed  for. 

13.  The  item  of  stocks  borrowed  against  short  sales 

is  important  enough  to  warrant  the  confirmation 
of  the  lender,  thereby  verifying  the  number  of 
shares,  the  description  of  the  security,  and  the 
price  and  rate  at  which  borrowed. 

14.  Dividends  which  have  been  or  are  to  be  received 

on  long  stocks  should  receive  the  attention  of 
the  auditor. 

15.  The  treatment  of  dividends  in  the  event  of  an 

"even  interest"  in  the  stock;  that  is,  where  some 
accounts  are  long  and  others  short  of  the  same 
security  during  dividend  time. 

16.  In  connection  with  dividends,  the  consideration  of 

due  bills  receivable  to  corroborate  the  right  to 
dividends  whose  payments  are  pending^ 

The  foregoing  relate  to  the  asset  section  of  the  balance 
sheet.    On  the  liability  side  the  audit  should  embrace : 

1.  Accounts  payable  representing: 

3         (a)   Open  credit  balances,  in  which,  however,  the 
accounts  have  no  further  equity  by  reason 
of  "long"  securities, 
(b)  Open  balances,  when  the  accounts  also  in- 
clude holdings  of  stocks  or  bonds. 

2.  Verification  of  accounts  payable  whose  equity  is 

subject  to  the  purchase  or  "cover"  of  short 
securities. 

3.  Certification  of  the  correctness  of  the  Notes  Pay- 

able account. 

4.  Verification  of  dividends  payable,  whether  arising 

from  borrowed  stock,  or  from  certificates  having 


2^2  BROKERAGE    AUDITING 

remained  in  the  client's  name  after  the  date  of 
sale.  In  connection  with  this  is  the  Due  Bill 
account  attesting  to  the  liability  of  dividend  pay- 
ment by  the  client. 

5.  The  examination  of  Stocks  Loaned  account,  cov- 

ering the  name  of  the  borrower,  the  number  of 
shares,  description  of  issue,  and  the  price  and 
rate  at  which  the  loan  stands. 

* 

6.  The  confirmation  with  the  lending  bank  or  broker 

of  any  money  borrowed  on  collateral  by  the  client, 
at  the  same  time  corroborating  the  amount  of 
the  loan,  its  duration,  the  collateral  contained 
therein,  and  the  rate  of  interest. 

The  third  list  of  audit  requirements  concerns  itself 
mainly  with  the  economic  or  income  statement  accounts. 
For  this  it  is  necessary: 

1.  To  examine  into  the  adequacy  of  reserves  which 

might  be  created  to  provide  for  depreciations 
and  doubtful  accounts,  directing  such  adjusting 
entries  to  be  made  as  seem  necessary  or  consistent 
with  the  policy  of  the  client  whose  books  are 
being  examined. 

2.  To    verify    the    Commission    account,    which    will 

present  no  little  hardship,  for  here  it  will  become 
necessary  to  check  the  individual  credits  and 
debits  from  the  blotters— clearing  house  and  ex- 
clearing  house. 

3.  To  verify  the  interest  on  customers'  accounts. 

4.  To  verify  the  interest  debits  or  credits  on  account 

of  stocks  loaned  or  borrowed. 

5.  To  verify  the  premiums  on  stocks  loaned  or  bor- 

rowed. 


STOCK    BROKERAGE    BOOKS 


233 


1 


6.  To  confirm  with  the  lender  or  borrower  the  interest 

on  money  borrowed  or  loaned. 

7.  To  examine  into  the  apportionment  over  the  period 

of  membership  dues  usually  paid  in  advance. 

8.  To  examine  into  other  deferred  debit  items,  such 

as  insurance  on  building,  taxes,  etc. 

Finally,  the  capital  accounts  of  the  partners,  and  the 
just  distribution  of  profits  and  losses  according  to  the  arti- 
cles of  copartnership,  will  claim  the  attention  of  the  auditor 
in  charge  of  the  examination. 


If 


■ 


* 


CHAPTER    XXXII 

AUDIT    OF    STOCK    BROKERAGE    BOOKS 

ASSET  ACCOUNTS 

While  the  audit  outline  of  the  preceding  chapter  is  fairly 
comprehensive,  there  is  a  probability  of  an  even  greater 
number  of  factors  being  found  in  any  particular  audit 
which  should  command  careful  consideration.  For  instance, 
there  may  be  a  substitution  of  securities  while  the  securi- 
ties accounts  are  being  inspected,  or  a  sale  of  certain  securi- 
ties while  the  auditor  is  working  on  the  account  in  which 
they  are  entered.  Such  possibilities  must  be  recognized 
and  provided  for,  as  it  is  obvious  that  if  once  the  control 
of  securities  is  lost,  the  continuance  of  the  examination 
becomes  absurd. 

In  the  present  consideration  it  is  not  intended  to  lay 
down  any  hard  and  fixed  rules  of  procedure,  but  only  to 
suggest  the  method  of  verifying  unusual  items  and  to  call 
attention  to  those  other  features  of  the  audit  which  require 
more  careful  scrutiny  or  special  procedure. 

Stock  Accounts  Receivable 

Unlike  the  mercantile  business  where  almost  every  entry 
grows  out  of  the  purchase,  sale,  or  return  of  merchandise, 
and  where  a  charge  to  a  customer's  account  presupposes 
such  a  transaction,  the  accounts  receivable  of  stock  houses 
may  represent  many  things.  They  may  show  purchases 
of  stocks  still  long,  balances  without  equity  to  the  cus- 
tomer, or  mere  advances  to  the  trader  for  one  reason  or 
another. 

The  only  sources  of  entries  to  the  customers  ledgers 

234 


STOCK  BROKERAGE  BOOKS 


235 


are  the  blotters.  Consequently,  the  blotters  may  be  looked 
to  and  depended  upon  to  reveal  a  complete  history  of  the 
transactions  appearing  in  the  accounts  receivable.  Having 
by  this  means  established  the  regularity  and  the  nature  of 
the  particular  account  under  review,  we  must  admit  such 
possibilities  as  may  require  further  proof  of  the  regularity 
and  correctness  of  any  particular  account.  Is  it  identified 
by  a  number  instead  of  a  name?  Or  does  it  bear  a  mis- 
leading letter?  In  either  case  the  rule  to  be  adopted  is 
the  authentication  of  the  account  by  the  client  or  by  some 
person  in  authority.  There  need  be  no  cause  for  imme- 
diate alarm  when  a  numbered  or  lettered  account  is  met, 
for  in  no  other  business,  perhaps,  are  the  accounts  of 
large  customers  more  sacredly  guarded.  Nor  is  there  any- 
where greater  need  for  a  positive  verification  of  accounts 
receivable  than  here.  Much  collusion  can  be  practiced  by 
clerks  through  the  operation  of  fictitious  accounts — a  fact 
that,  some  years  since,  was  brought  out  very  forcibly  by 
the  testimony  of  a  member  of  a  certain  Exchange,  whose 
concern  carried  the  account  of  a  prominent  executive  at 
Albany. 

In  any  event,  the  auditor  should  insist  upon  a  statement 
from  his  client  to  the  effect  that  all  such  numbered  ac- 
counts are  known  to  him.  Also  the  identity  of  the  customer 
should  be  made  known  to  the  auditor,  whereupon  the  usual 
letter  of  the  client  should  accompany  the  auditor's  request 
for  verification  of  balances  and  securities  as  appearing  upon 
the  statement  of  the  customer.  At  the  same  time,  the 
number  of  shares,  the  description  of  the  securities,  the 
balances  against  or  in  favor  of  the  customer,  should  be 
recorded  on  a  separate  statement  for  the  auditor's  benefit; 
or  else  the  statement  of  the  customer  should  be  copied  in  a 
press  book  for  the  auditor's  benefit  before  being  mailed  to 
the  customer.     Invariably  the  customer  will  respond  very 


236 


BROKERAGE    AUDITING 


promptly,  for  it  is  much  to  his  interest  to  answer  all  com- 
munications of  auditors  engaged  in  an  examination  of  his 
broker's  books.  This  is  particularly  true  of  margin 
customers. 

If  still  further  scrutiny  is  desirable,  the  auditor  may  go 
to  the  length  of  procuring  the  client's  authentication  of  all 
signatures  subscribed  to  the  returned  letters  of  confirma- 
tion. On  the  other  hand,  if  any  of  the  customers  fail  to 
reply,  then  the  client  should  be  apprised  of  the  fact  in  the 
report  rendered  at  the  close  of  the  examination. 

Under  stock  accounts  receivable,  another  salient  feature 
should  be  noted,  namely,  the  sufficiency  of  margins.  As 
has  been  pointed  out  under  the  subject  of  equity  tables,  a 
customer's  account  may  be  approaching  the  danger  mark 
as  far  as  his  margins  are  concerned.  Again,  there  may 
not  be  a  vestige  of  margin  left  in  the  account,  so  that 
the  difference  betvi^een  the  ledger  debit  and  the  market 
value  of  the  securities  held  by  the  customer  leans  towards 
"a  minus  equity"  to  the  customer  after  sale.  Here,  the 
nature  of  the  account  would  change  from  a  stock  account 
receivable  to  an  ordinary  doubtful  or  uncollectible  account 
receivable.  The  importance  of  this  point  can  be  readily ' 
seen  by  referring  to  the  case  of  the  customer  who,  having  a 
credit  extended  to  him,  had  an  open  loss  of  $25,000  on 
a  purchase  of  5,000  Steel. 

In  conclusion,  it  may  be  said  that  a  general  classifica- 
tion should  be  made  of  the  various  stock  receivable  accounts, 
grouping  credit  customers,  margins  accounts,  minus  equity- 
accounts,  and  doubtful  accounts  containing  no  securities. 

The  Revenue  Stamps  Account 

The  Revenue  Stamps  account  is  nothing  more  than  an 
inventory  account.  It  records  the  purchase  of  stamps  on 
the  debit  side  and  the  consumption  figure  on  the  credit 


STOCK    BROKERAGE    BOOKS 


237 


side,  these  representing  the  use  of  the  stamps  on  account 
of  sales  or  transfers.  The  balance  figures  should  agree  with 
those  resulting  from  a  physical  inventory  taken  by  the 
auditor. 

The  item  of  revenue  stamps  is  an  important  one, 
requiring  keen  inspection. 

Securities  of  Customers 

Whether  the  customer  is  long  or  short  of  securities, 
every  single  share  of  stock  as  recorded  by  the  securities 
ledger  should  be  traceable  to  its  place  of  deposit. 

If  John  Brown,  for  instance,  is  long  of  100  shares  of 
Copper,  they  should  be  in  one  of  four  places,  i.e.,  in  the 
vault,  in  the  transfer  office,  in  a  stock  loan,  or  in  a  collateral  '^ 
loan  with  some  bank  or  broker.  Their  position  should  be 
confirmed  by  physical  examination  if  in  the  vault,  or  by 
letter  if  at  the  transfer  office  or  in  either  stock  loan  or 
collateral  loan. 

Or,  if  John  Brown  is  short  of  100  Steel,  they  should  be 
accounted  for  in  one  of  two  ways,  i.e.,  they  may  be  bor- 
rowed— in  which  case  the  auditor  should  confirm  the  bor- 
rowing of  the  shares  by  communicating  with  the  lender 
thereof — or  it  may  be  that  100  shares  of  Steel  long  by 
another  customer  have  been  used  to  make  delivery  against 
the  short.  It  should  be  remembered  that  the  broker  may 
use  long  securities  only  with  the  customer's  permission. 

Wherever  possible,  in  all  cases  involving  such  securi- 
ties a  thorough  examination  of  the  certificates  t)f  stock 
should  be  made,  taking  note  of  the  serial  number  in  each 
instance.  If  the  auditor  be  engaged  in  verifying  securities, 
and  occasion  should  arise  for  the  broker  to  use  a  particular 
certificate  of  stock,  then  the  serial  number  should  again 
be  taken  and  a  notation  made  accounting  for  this  certificate 
in  one  of  the  following  ways : 


238  BROKERAGE    AUDITING 

1.  Sale. 

2.  Pledged  as  collateral  in  a  loan. 

3.  Lent  out  in  the  Street. 

4.  At  the  transfer  office  for  re-registration. 

5.  At  the  bank  for  purposes  of  substitution,  that  is,  to 

be  exchanged  for  such  securities  as  might  be  nec- 
essary for  delivery  against  a  sale. 

In  the  last  case  the  certificates  which  were  received  in 
return  should  be  taken  care  of  in  accounting  for  their 
position.  ' 

Bonds  are  either  registered  or  coupon  in  character.  In 
examining  coupon  bonds,  it  should  be  noted  that  all  coupons 
are  intact,  and  any  irregularities  should  be  commented  upon. 
For  example,  if  a  bond  bearing  January  and  July  coupons 
be  examined  in  June,  it  should  bear  the  coupon  of  July  of 
the  same  year  and  all  others  until  maturity. 

While  considering  coupon  bonds,  the  necessity  of  de- 
termining whether  all  coupons  have  been  placed  to  the 
credit  of  the  account  owning  the  bonds  becomes  very 
patent.  Coupons,  while  they  are  negotiable  (being  bearer 
instruments),  are  nevertheless  subject  to  a  collection  rule 
which  most  banks  have  laid  down — namely,  that  all  coupons 
must  be  enclosed  in  an  envelope  bearing  the  name  of  the 
depositor  and  that  of  the  corporation  by  which  the  coupons 
are  payable.  Consequently,  some  supervision  is  possible 
along  these  lines. 

Registered  bondholders  receive  interest  checks  direct 
from  the  paying  company.  Here  too,  a  watchful  eye  must 
be  given  to  the  payments  of  interest  during  the  period,  or 
those  pending  between  the  commencement  of  the  examina- 
tion and  the  completion  thereof.  In  the  matter  of  regis- 
tered bonds,  the  serial  number  should  be  recorded,  and  it 
should  be  noted  that  the  bond  is  negotiable  in  nature. 


STOCK    BROKERAGE    BOOKS 


239 


Depreciation  of  Securities  Owned 

Securities  may  be  held  for  investment  by  the  client,  i.e., 
the  broker  for  whom  the  audit  is  made.  In  such  cases 
the  tendency  is  to  carry  securities  at  cost,  but  conservatism 
and  good  accounting  principles  dictate  the  practice  of  taking 
cognizance  of  any  variance  in  values,  particularly  so  if  such 
values  show  a  depreciation.  As  the  auditor  is  employed 
to  examine  books  and  not  to  criticise  methods  or  policies 
of  his  client,  he  can  hardly  do  more  than  make  the  subject 
of  depreciation  of  values  an  item  in  his  report.  Needless 
to  say,  if  he  be  requested  to  adjust  values,  he  should  not 
overlook  this  important  account. 

Money  Loaned  Account 

It  is  not  an  uncommon  practice  for  brokers  to  lend 
money  in  the  "loan  crowd"  of  the  Exchange.  The  loan, 
having  thus  been  created,  is  subject  to  examination  by  the 
auditor  and  should  be  confirmed  by  the  borrower  as  to 
the  collateral  contained  therein,  the  amount  of  the  loan,  the 
rate  of  interest,  and  the  duration.  Inasmuch  as  the  loan 
envelope  will  be -available  for  inspection,,  this  should  be 
taken  advantage  of  to  substantiate  the  record  appearing  in 
the  "Money  Loaned  Book,"  which  is  further  supported 
by  the  account  in  the  general  ledger  bearing  the  same 
caption.  The  adequacy  of  margin  should  be  investigated, 
and  in  the  event  of  insufficiency  should  be  brought  to  the 
notice  of  the  client.  On  liquidated  loans,  the  auditor  should 
test  the  correctness  of  the  interest. 

There  is  much  to  be  said  about  call  loans,  inasmuch 
as  the  interest  rate  is  variable,  and  it  behooves  the  auditor 
to  check  not  only  the  prevailing  rate  of  interest  but  also 
the  changes  from  the  day  the  loan  was  made  up  to  the 
present  period.  Since  the 'lender  is  only  pledgee  for  the 
securities,  he  may  only  hold  them  as  a  pledge  and  not  use 


240 


BROKERAGE    AUDITING 


them  for  any  purpose.  If  he  does,  such  use  may  render 
him  liable  to  a  charge  of  conversion.  For  this  reason,  the 
whereabouts  and  use  of  such  securities  should  be  carefully 
investigated  and  immediate  attention  be  called  to  any 
irregularities  discovered. 

On  time  loans  the  same  general  procedure  is  to  be  fol- 
lowed, the  only  difference  being  in  the  interest  payments. 
This  will  be  touched  upon  in  Chapter  XXXIII. 

Furniture  and  Fixtures 

It  is  almost  a  fixed  rule  among  brokers  to  charge  the 
cost  of  furniture  and  fixtures  to  income.  In  practice  one 
meets  this  condition  constantly.  In  principle  the  method 
is  very  wrong,  indeed. 

In  such  cases  it  will  devolve  upon  the  auditor  to  explain 
that  an  account  should  be  set  up  with  furniture  and  fixtures, 
showing  the  purchase  price,  which  in  reality  amounts  to 
many  thousands  of  dollars.  When  this  account  is  found, 
the  auditor  upon  questioning  will  usually  be  told  that  a 
nominal  rate  of  10%  is  annually  charged  off  on  account 
of  depreciation.  If  no  reserve  for  such  depreciation  has 
been  set  aside,  the  practice  should  be  advocated.  Usually 
it  will  be  found  that  the  broker  is  either  too  conservative 
in  his  accounting  allowances  or  too  liberal.  The  tendency, 
verj^  regretably,  leans  strongly  towards  carelessness. 

Land  and  Buildings 

A  few  of  the  larger  brokerage  concerns  occupy  entire 
buildings  for  their  business  use.  They  may  own  or  lease 
these  buildings.  Where  owned,  the  necessity  of  deprecia- 
tion should  again  be  emphasized.  Also  the  items  of  taxes 
and  insurance  should  be  intelligently  accounted  for,  appor- 
tioning the  insurance  over  the  period  and  making  due 
allowance  for  the  accruing  taxes. 


STOCK    BROKERAGE    BOOKS 


241 


Stocks  Borrowed 

The  subject  of  "stocks  borrowed"  has  been  discussed 
in  connection  with  short  sales  of  customers.  But  for  audit- 
ing purposes  it  should  be  treated  under  a  separate  heading. 

Stocks  borrowed  are  equivalent  to  money  loaned.  How- 
ever, the  constant  marking  up  and  marking  down  of  values 
while  the  stock  is  borroVved  presents  no  little  task  to  the 
auditor,  who  must  consider  the  various  changes  that  have 
taken  place  since  the  particular  stock  was  borrowed.  All 
such  changes  in  value  and  interest  rates  should  be  listed 
and  the  listing  be  made  the  contents  of  a  letter  of  con- 
firmation to  be  sent  to  the  lending  broker. 

Dividends  Receivable 

Among  other  items  of  importance  to  the  auditor  is  that 
of  dividends.  The  Dividends  Receivable  account  should 
show  the  shares  of  stock  upon  which  dividends  have  been, 
or  are  to  be,  received.  In  proving  the  correctness  of  this 
account,  the  stock  ledger  should  be  consulted  for  informa- 
tion in  regard  to  the  long  stocks  upon  which  dividends 
are  due.  A  record  should  be  compiled  of  the  purchases 
and  sales  of  all  dividend-bearing  stocks  within  the  period, 
closely  watching  for  sales  and  purchases  before  dividend 
declaration  time.  By  checking  the  open  "longs"  with  the 
Dow  Jones  Dividend  List  or  any  other  official  dividend 
indicator,  the  charges  in  the  Dividends  Receivable  account 
can  be  proved. 

Credits  may  appear  in  this  account,  with  complementary 
entries  to  the  Due  Bills  Receivable  account.  In  that  case 
it  is  evident  that  the  stock  upon  which  the  dividend  is  to 
be  paid  was  sold  after  declaration  day,  but  before  the  day 
of  payment.  In  the  event  of  due  bills,  they  should  be  care- 
fully examined  and  confirmed  by  the  broker  issuing  same. 

As  a  last  factor  in  proving  Dividends  Receivable  account, 


/ 


242 


BROKERAGE    AUDITING 


it  should  be  recalled  that  the  sale  of  short  stocks  of  a 
similar  class  might  prevent  the  appearance  of  an  entry  in 
either  "Dividends"  account  or  Due  Bills  account.  This  is 
so  by  reason  of  the  offset  appearing  in  the  ex-blotter,  and 
attesting  to  the  fact  that  the  "long"  customer  was  credited 
with  the  dividends  and  the  "short"  customer  charged  there- 
with. It  is  obvious  that  this  situation  precludes  the  pos- 
sibility of  a  dividend  being  received  if  the  certificate  was 
transferred  by  the  buying  broker  at  the  time  delivery  was 
made  by  the  client  broker  against  the  short  sale  of  his 
customer.  The  point  is  mentioned  here  merely  to  put  the 
accountant  on  guard  should  he  meet  such  a  condition.  Of 
course,  it  must  be  borne  in  mind  that  the  client  may  receive 
dividends  on  stock  in  which  he  has  no  "net  interest,"  due 
to  the  fact  that  the  buyer  could  not  or  did  not  transfer 
the  certificates  in  time  to  receive  the  dividend  check  direct 
from  the  corporation. 

Having  compiled  such  information  as  can  be  used  to 
check  the  entries  in  the  Dividends  Receivable  account,  the 
auditor  should  proceed  with  the  checking  of  dividend 
credits  appearing  in  the  customers'  accounts.  In  this  con- 
nection it  should  be  remembered  that  the  practice  in  some 
concerns  is  to  credit  the  customer's  account  without  the 
operation  of  the  Dividends  Receivable  account,  and*among 
other  brokerage  houses  a  practice  is  made  of  crediting 
the  customer  upon  declaration  day  rather  than  on  the  pay- 
ment day.  If  the  important  facts  be  kept  in  mind,  little 
difficulty  should  be  experienced  in  auditing  "dividends." 


CHAPTER    XXXIII 

AUDIT  OF  STOCK  BROKERAGE  BOOKS 
LIABILITY  ACCOUNTS;   INCOME  ITEMS 


LIABILITY   ACCOUNTS 

Accounts  Payable 

The  only  accounts  payable  usually  found  in  the  audit  of 
a  broker's  books  are  in  the  nature  of  "short"  accounts  and 
open  credit  balances  having  no  securities.  There  may  be 
one  or  two  accounts  which,  besides  having  such  balances, 
are  also  long  of  securities  that  for  the  most  part  can  be 
traced  to  the  safe  deposit  box. 

The  procedure  here  is  to  check  the  transactions  appear- 
ing within  the  period  covered,  with  the  blotters  and  securi- 
ties ledger.  If  interest  be  allowed  on  open  credit  accounts, 
its  amount  should  be  tested.  The  appearance  of  interest 
other  than  that  allowed  on  margins  on  short  accounts  should 
provoke  inquiry  as  to  the  regularity  of  the  interest  credit. 
The  general  rule  is  not  to  allow  interest  save  on  "short" 
margins,  unless  a  special  arrangement  therefor  be  made 
with  the  customer. 

In  the  matter  of  short  accounts,  the  same  procedure  as 
obtained  in  long  accounts  receivable  should  be  followed  in 
determining  the  adequacy  of  margins  on  the  open  commit- 
ments. In  both  accounts  receivable  and  payable,  where  an 
interest  in  the  market  is  evidenced  by  the  records,  the  audi- 
tor should  inquire  as  to  the  classification  of  accounts;  that 
is,  whether  the  customer  is  trading  on  a  credit  extension 
or  whether  he  is  operating  on  margin.     This  distinction 

243 


\ 


f 


244 


BROKERAGE    AUDITING 


is  an  important  one,  particularly  so  if  the  auditor's  report 
is  to  be  used  for  the  purpose  of  securing  banking  favors. 
Approaching  the  subject  of  short  accounts  from  the 
angle  of  "stocks  borrowed,"  it  is  important  to  determine 
whether  the  short  stock  is  borrowed  in  the  Street  or  from 
a  customer.  Under  the  present  law  it  is  conversion  to 
borrow  stocks  from  long  customers  in  order  to  make  de- 
livery against  short  sales,  unless  the  long  customer  has 
signed  a  waiver  giving  the  broker  the  right  of  hypotheca- 
tion for  the  amount  in  excess  of  the  balance  owed  by  the 
customer. 

Dividends  Payable 

It  has  already  been  pointed  out  that  the  Dividends 
Payable  account  is  created: 

1.  Where  stock  sold  before  dividend  declaration  day 

remains  in  the  client's  name  until  after  a  dividend 
has  been  declared.  In  such  cases,  upon  receipt 
of  the  dividend  check,  the  Dividends  Payable 
account  should  be  credited  until  the  dividend  is 
claimed  by  the  broker  holding  the  certificate  of 
stock. 

2.  Where  a  dividend  is  declared  on  short  stock  which 

has  been  borrowed  from  the  Street.  In  such  case 
the  customer's  account  is  charged  and  the  Divi- 
dends Payable  account  is  credited,  being  charged 
only  after  a  due  bill  is  sent  to  the  lending  broker. 
Under  that  circumstance  the  Due  Bills  Payable 
account  would  attest  the  liability. 

The  further  procedure  in  verification  of  dividends  pay- 
able is  similar  to  that  prescribed  for  dividends  receivable 
in  the  preceding  chapter. 


( 


STOCK    BROKERAGE    BOOKS 


245 


H  *^ 


•■ 


f<iBp 


Stocks  Loaned 

The  procedure  in  auditing  the  Stocks  Loaned  account 
is  identical  with  that  prescribed  for  the  verification  of  stocks 
borrowed. 

Bank  Loans  and  Brokers'  Loans 

In  the  audit  of  loans  from  banks  and  brokers,  it  is 
necessary  to  get  the  lender's  confirmation  of  the  collateral 
contained  in  the  loan;  also  of  the  amount,  the  rate  of  in- 
terest, and  the  sufficiency  of  collateral.  If  it  be  a  demand 
loan,  the  daily  interest  changes  should  also  be  noted  in 
the  letter  of  confirmation.  In  the  case  of  a  time  loan,  the 
duration  should  be  stated,  together  with  the  interest  accrued 
thus  far.  The  agreement  with  the  lender  may  call  for  the 
interest  to  be  paid  in  advance,  monthly  or  at  the  liquida- 
tion of  the  loan.  All  such  data  should  be  availed  of  wherever 
possible. 

INCOME   ITEMS 
Commissions 

As  was  pointed  out  in  Chapter  XIV,  the  commissions 
of  the  securities  department  may  arise  from  two  sources: 

1.  The  execution  of  orders  for  customers. 

2.  The  execution  of  orders  for  other  members  of  the 

same  Exchange,  either  for  "carrying'*  transac- 
tions, "clearances,'*  or  "give  up"  business. 

The  charges  against  the  Commission  account  result 
from : 

1.  Floor  brokerage  due  to  brokers  for  the  execution 

of  orders. 

2.  Commission   owing  to   other  brokerage   concerns 

which  may  be  carrying  the  client's  commitments 
for  him. 

3.  Commission  charged  on  clearances. 


246 


BROKERAGE    AUDITING 


All  charges  and  credits  to  the  Commission  account 
should  be  tested  by  reference  to  the  blotter  containing  such 
entries,  and  by  the  compilation  from  the  purchases  and  sales 
book  of  a  statement  of  orders  executed  by  other  floor 
brokers.  The  credits  to  this  account  arising  out  of  the 
execution  of  orders  for  other  concerns,  can  be  traced  to 
the  record  from  which  the  monthly  commission  bills  are 
made  out.  This  last  record  should  be  carefully  scrutinized. 
If  these  bills  have  not  been  paid,  as  evidenced  by  the  books, 
written  confirmations  should  be  secured  from  the  respective 
brokers  for  the  purpose  of  verifying  those  outstanding 
items  of  which  no  previous  cognizance  had  been  taken. 

Interest  Charges  and  Credits  on  Customers*  Accounts 

Some  customers  ledgers  are  so  ruled  as  to  give  the  num- 
ber of  days  for  which  interest  is  to  be  charged  or  credited, 
and  the  individual  interest  amounts  are  carried  into  an  in- 
terest column.  The  net  difference  between  the  charges  and 
credits  is  then  passed  through  the  ex-blotter  for  journaliza- 
tion, and  debited  to  the  customers'  accounts  in  the  usual 
manner. 

This  arrangement  is  ideal  but  is  seldom  met.  The 
general  rule  is  to  make  interest  calculations  on  the  state- 
ment, of  which  a  press  copy  is  made.  The  net  amount  of 
interest  to  be  charged  or  allowed  is  entered  net  to  the 
customer.  Wherever  this  system  prevails,  use  should  be 
made  of  the  press-copy  books  to  test  the  interest  debits  and 
credits. 

The  auditor  will  also  meet  cases  where  no  press  copies 
are  made.  In  that  event  it  would  be  safe  to  test  the  interest 
on  each  transaction  appearing  in  the  accounts.  Under  the 
rule  of  the  Exchange,  it  is  in  violation  of  the  commission 
law  to  rebate  interest.  Wherever  such  rebates  are  discov- 
ered, they  should  be  called  to  the  attention  of  the  client 


STOCK    BROKERAGE    BOOKS 


247 


so  that  proper  adjustment  may  be  made  if  possible  or  a 
recurrence  prevented. 

In  the  discussion  of  accounts  payable  in  the  present 
chapter,  it  was  intimated  that  accounts  payable  with  open 
credits  seldom  benefit  by  interest  credits.  The  method  of 
procedure  suggested  there  could  be  followed  to  good  ad- 
vantage in  the  general  investigation  of  interest  charges. 

Interest  on  Stock  Loans  and  Premiums 

Exacting  methods  should  be  adopted  in  proving  the 
interest  and  premiums  on  stocks  borrowed  and  loaned. 
The  stocks  borrowed  and  loaned  book  offers  the  best  founda- 
tion upon  which  to  build  the  interest  accounts.  On  clearing 
house  stock  returned  or  called,  recourse  should  be  had  to 
the  clearing  house  blotter  containing  the  record  of  the 
transaction.    The  interest  should  be  thoroughly  tested. 

The  premiums  appearing  in  the  premium  accounts  should 
be  examined  in  like  manner.  The  rule  of  the  Exchange 
should  be  remembered,  that  premiums  are  not  to  be  charged 
for  Saturdays,  Sundays,  and  hoHdays. 

Where  interest  or  premiums  have  accrued  or  are  ac- 
cruing, a  confirmation  should  be  sent  to  the  broker  on  the 
other  side  of  the  transaction.  This  procedure  will  disclose 
any  error  or  irregularity. 

Expense  Items 

Expenditures  are  to  be  verified  in  the  usual  manner. 
As  a  suggestion,  however,  it  would  be  well  to  get  a  state- 
ment from  the  client  as  to  what  expenditures  are  consistent 
or  customary  to  the  business.  All  vouchers  should  be 
examined  carefully,  and  especially  those  concerned  with  the 
expenses  of  branch  offices  and  solicitors. 

Final  Procedure 

The  auditor  should  examine  the  table  of  equities,  being 


248 


BROKERAGE    AUDITING 


especially  careful  as  to  accounts  with  minus  equities  and 
accounts  nearing  the  margin-exhaust  point. 

The  system  obtaining  in  the  concern  under  audit  should 
not  be  attacked  unnecessarily,  for  the  very  good  reason  that 
unsolicited  information  is  undesirable  in  the  vast  majority 
of  cases.  Of  course,  it  behooves  the  auditor  to  point  out 
where  losses  and  leakages  could  be  prevented,  but  beyond 
that  it  would  be  indiscreet  to  submit  a  dissertation  on  the 
relative  weakness  of  the  system  or  the  morale  of  the  office 
staff. 

As  a  final  word  in  the  audit  of  the  stock  brokerage 
business,  the  auditor  should  bear  in  mind  that  the  report 
is  more  comprehensible  to  the  client  if  the  technical  terms 
be  used.  It  is  a  fact  that  the  broker  thinks  and  speaks 
in  the  parlance  of  the  Street,  and  any  other  accounting 
terminology  is  as  foreign  to  him  as  his  vernacular  is  to 
the  layman. 


CHAPTER    XXXIV 

AUDIT  OF  COTTON   BROKERAGE   BOOKS 

Outline  of  Audit 

The  audit  of  cotton  brokerage  books  will  require  the 
verification  or  confirmation  of: 

1.  Petty  and  general  cash. 

2.  Accounts  receivable  representing  open  debit  balances 
of  credit  customers  and  of  marginal  accounts,  both  having 
no  interest  in  the  market. 

3.  Accounts  receivable  which  have  commitments  open 
showing  gains  large  enough  to  offset  their  ledger  balances. 

4.  Accounts  receivable,  mainly  credit  accounts,  whose 
open  transactions  show  market  losses,  thereby  augmenting 
the  ledger  debit. 

5.  Accounts  receivable  against  which  spot  cotton  ware- 
house certificates  are  held,  thereby  creating  equities  in  favor 
of  the  customer. 

6.  Notes  receivable. 

7.  Street  margins  deposited  by  the  client. 

8.  Agreements  between  the  client  and  other  houses  to 
give  checks  as  margins,  instead  of  depositing  with  the 
Superintendent  of  the  Exchange  in  the  usual  way. 

9.  Contracts  open  for  account  of  customers,  stating  the 
date  of  purchase  or  sale,  the  option,  and  the  price. 

10.  Contract  Differences  account,  debit  or  credit,  in- 
volving : 

(a)  Sending  confirmations  of  open  trades  to  customers. 

(b)  Sending  confirmations  of  open  trades  to  Street 

brokers. 

249 


4 


250  BROKERAGE    AUDITING 

(c)  Checking  account  sales  during  the  period  embraced 

bv  the  audit. 

(d)  Checking  receipts   from,   and  payments  to,  the 

clearing  house  and  ex-clearing  house  brokers. 

(e)  Checking  of  point  balance;  this 

(f)  Resulting  in  present  balance  in  Contract  Differ- 

ences. 

11.  Accounts  payable  with  customers,  this  being  done 
in  the  usual  way,  carefully  noticing  any  numbered  or 
lettered  accounts. 

12.  Adequacy  of  margins  on  open  commitments  of  credit 
customers,  seeing  that  no  calls  have  been  overlooked. 

•    13.  Sufficiency  of  margins  on  the  open  trades  of  margin 
customers. 

14.  Spot  transactions  carried  on  margins — ^the  charges 
of  labor,  storage,  insurance,  and  interest  always  being  added 
to  the  open  debits. 

15.  Notes  discounted. 

16.  Loans  payable,  containing  collateral  in  the  nature 
of  warehouse  certificates. 

It  is  also  necessary  to — 

17.  Test  thoroughly  the  Commission  account,  being 
careful  to  include  in  the  examination  the  verification  of 
commission  bills  receivable  and  payable. 

18.  Test  beyond  a  doubt  the  correctness  of  interest  on 
margins  released,  notes  receivable,  notes  payable,  and  loans 
payable. 

19.  Give  the  expense  factors  the  same  careful  scrutiny 
that  was  suggested  under  the  securities  audit. 

20.  Finally,  investigate  the  division  of  profits  and  losses 
as  per  the  articles  of  agreement. 

Accounts  Receivable 

Unless  the  account  be  that  of  a  credit  customer,  there 


COTTON    BROKERAGE    BOOKS 


251 


should  exist  no  customers'  accounts  receivable  on  the  books 
of  the  cotton  department,  except  in  the  case  of  a  customer 
having  open  trades  showing  a  profit  large  enough  to  equal 
or  exceed  the  indebtedness.  It  is  almost  conclusive  that  if 
any  other  accounts  receivable  be  discovered,  such  accounts 
are  to  be  reserved  or  written  off  entirely.  It  devolves  upon 
the  examiner  to  call  the  client's  attention  to  such  cases 
whenever  they  arise. 

There  is  still  another  set  of  accounts,  mainly  to  be  sought 
in  credit  accounts,  where  a  market  loss  is  to  be  added  to 
the  debit  balance  in  the  ledger,  thereby  increasing  the  in- 
debtedness. If  a  credit  agreement  has  been  entered  into 
between  the  client  and  the  customer,  the  fact  should  be 
made  known  to  the  auditor,  for  without  such  knowledge 
the  results  of  the  examination  are  misleading,  the  basis  for 
the  division  of  accounts  having  been  disturbed. 

Other  accounts  receivable  are  fully  secured  by  having  as 
collateral,  spot  cotton  warehouse  certificates.  In  such  ac- 
counts items  of  interest,  labor,  storage,  and  commission 
are  to  be  looked  for.  Storage  and  interest  are  charged 
monthly,  while  labor  and  insurance  are  charged  upon  ex- 
piration of  the  policy,  or,  as  in  the  case  of  labor,  when 
the  cotton  is  moved  at  the  time  of  sale  or  shipment. 

Street  Margins 

Verify  Street  margins  deposited  by  the  client,  by  send- 
ing written  confirmations  to  the  broker  for  whose  benefit 
the  deposit  was  made.  On  margins  released  within  the 
period,  it  is  incumbent  upon  the  accountant  to  prove  the 
deposits  and  releases,  paying  strict  attention  to  the  fact 
that  margins  are  "up"  only  when  necessary,  meaning  that 
the  margins  so  deposited  represent  either  market  losses  or 
"original"  calls. 

On  Street  margins  up  by  other  brokers,  as  evidenced 


252 


BROKERAGE    AUDITING 


by  the  Street  margin  record,  verification  should  also  be 
had  by  the  usual  letter  of  confirmation.  In  this  connection 
it  should  be  noted  that  there  are  large  concerns  in  the 
Street  which  are  not  called  until  a  certain  sum  is  owing— a 
sort  of  credit  comity  between  the  house?.  Now,  if  the 
auditor  should  meet  such  accounts,  he  should  first  determine 
by  inquiry  whether  the  house  in  question  is  callable  within 
certain  limits.  Otherwise,  as  a  rule,  no  broker  should  owe 
the  client  more  than  $500  without  being  called.  Accounts 
which  show  "no  margin  up"  should  be  commented  upon 

in  the  report. 

Sometimes  it  is  advisable  for  houses  to  exchange  checks 
for  the  amount  owing  on  open  trades,  rather  than  deposit 
such  sums  in  the  usual  way.  This  would  allow  the  use 
of  the  funds  by  the  concerns  to  whom  the  margins  are 
owing.  Before  remarking  upon  the  absence  of  margins 
"up"  by  other  concerns,  it  would  first  be  advisable  to  con- 
sult the  general  ledger  with  this  possibility  in  mind. 

Open  Trades  of  Customers 

Statements  containing  a  list  of  open  trades  should  be 
sent  to  each  customer  for  verification,  accompanied  by  the 
request  to  return  the  same  to  the  auditor  at  once,  the  purpose 
of  the  request  being  stated. 

Verification  of  the  Contract  Differences  Account 

The  advices  received  from  customers  should  form  the 
basis  for  verification  of  the  Contract  Differences  account 
in  the  general  ledger.  In  connection  therewith,  it  will  be 
necessary  to  confirm  with  the  brokers  in  the  Street  all  open 
trades,  giving  the  number  of  bales,  the  options,  and  prices. 
The  return  advices  are  to  be  used  for  purposes  of  verifying 
the  Contract  Differences  account  in  the  manner  prescribed 
under  the  section  "Point  Balance"  (Chapter  XXI). 


COTTON    BROKERAGE    BOOKS 


253 


The  account  sales  rendered  to  the  customers  should  be 
checked  with  the  purpose  of  testing  proper  charges  and 
credits  to  the  Contract  Differences  account.  The  receipts 
and  payments  made  on  account  of  clearing  house  settle- 
ments should  be  checked  to  the  cash  book,  which  in  turn 
should  be  tested  with  the  monthly  charges  and  credits  in 
the  Contract  Differences  account. 

By  setting  up  the  facts  as  outlined,  the  point  balance 
will  receive  not  only  the  usual  check,  but  also  that  involved 
in  a  thorough  compilation  of  all  facts  entering  into  the 
construction  of  the  account  under  review. 

Accounts  Payable 

The  accounts  payable  with  customers  represent  margins 
deposited  on  market  commitments.  Under  the  law  of  the 
Exchange,  no  interest  may  be  allowed  on  deposits  of  cus- 
tomers' margins.  If  a  violation  of  this  rule  be  apparent,  it 
should  be  brought  to  the  attention  of  the  client  and  be 
remedied  immediately.  A  statement  of  each  account  mailed 
to  the  party  to  whom  it  is  owing,  with  a  request  to  con- 
firm, will  assure  a  thorough  check  of  the  accounts  payable. 
All  the  account  sales  should  again  be  checked  to  the  cus- 
tomers' accounts,  together  with  cash  receipts  and  cash 
disbursements  from  the  check  book.  Journal  entries  should 
also  be  checked,  as  they  affect  the  accounts  of  customers 
through  bank  advices.  The  margins  of  customers  should 
be  looked  into,  calling  attention  to  any  "weak  accounts." 
Always  consult  the  table  of  equities  in  regard  to  margins. 

Commissions 

Commissions  should  be  checked  from  the  contract 
analysis  journal  and  from  commission  bills  receivable  and 
payable.  The  suggestions  as  to  the  verification  of  unpaid 
bilk  in  the  stock  brokerage  audit  may  be  well  adopted  here. 


254 


BROKERAGE    AUDITING 


Interest  on  Margins 

Interest  on  brokers'  margins  should  be  tested  in  the 
following  manner : 

1.  Ascertain  the  date  of  deposit  and  the  date  of  release. 

2.  Compute  the  interest  for  the  number  of  days  that 

the  margin  was  on  deposit. 

Audit  of  Other  Commodity  Departments 

The  same  procedure  as  outlined  for  the  audit  of  the 
cotton  department  may  be  used  to  good  advantage  in  the 
audit  of  the  produce,  grain,  cottonseed-oil,  and  coffee 
departments.  The  only  difference  really  arises  in  the  matter 
of  proving  the  Contract  Differences— Clearing  House  ac- 
count and  the  Contract  Differences — Oil  account.  If  the 
verification  of  the  "Point  Balance"  as  outlined  in  Chapter 
XXI  be  followed,  no  difficulty  need  be  experienced  in  test- 
ing the  accuracy  of  the  accounts  in  discussion. 


Part  V — Forms 


CHAPTER    XXXV 


STOCK    BROKERAGE    FORMS 


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STOCK    BROKERAGE 


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/ 

/ 

0  0 

. 

0 

0 

0) 

c/) 


I 

en 
O 
O 


o 
o 

■4-» 
U 

PJ 

o 

ll 

o 

•4-» 

3 

u 


o 

(Z4 


COTTON    BROKERAGE 


287 


6.  orULu. 


^AA/rviM^,   cJ  JD- 


Remarks: 


DATE 

\e1t5 


jdlX/. 


'*?' 

^ 


3. 


EXPLANATORY 


jbeJpct6*M-  TkUd  l^e(L>Jif 


Soo 


yucui 


Fa. 


3(0 


DEBIT 


122 


CREDIT 


Z2l2a 


balance: 


DEBIT 


CREDIT 


Z22D. 


222. 


Form  28.    Customers  Ledger 


^!f 


>  I 


288 


FORMS 


COTTON    BROKERAGE 


289 


m: 


1 


lliCl^mhr   I9IS 

GENERAL 

SPECIAL        1 

3UNt 

RY  BANKS     CIC 

TOMERS 

f=OL    D( 

Bbit        Cr 

«di+         D 

ebit         Cr 

edit 

2. 

n^.tUfU^iS^A^nj^ 

• 

522 

So  ^fud  (had 

• 

^Of 

[kifrn/  yoeipir e{tvv\t  advKciu 

. 

1   (      .        y      / 

3 

fl'K.ThU^hLaM^ 

• 

2>5b 

1  u                  ■    - 

• 

2^ 

^e|(  lfcfnf:iSoo-4LM^  cLeK. 

V                                    0 

CUbX^lt.  X^^u^Kf  4*^t^ 

/ 

/  coo 

• 

' 

looo 

(Wben.fvuxAfJ-  of  Ufvu  fi*m. 

- 

= 

r —— r 

1 — m 

rm  inr 

Mil    II TT 

Trmnr 

TTTTl 

Form  29.    General  Journal 


en 


0/ 


o 

n 
u 


8 


i2 


I 


n 


290 


FORMS 


CO 


O 

O 

pq 

u 


o 

CO 


o 


COTTON    BROKERAGE 


291 


It 

/<?/5 

DEBIT 

1    CREDIT   IbSlANCE 

^hUtfi 

'     7?tz2/l^?7L^^ljM^,fa»fjb^,il*W>Oa- 

4>t         [00 

1          ?}3 

3 

0          "               •       AlltLeLojiy 

4>c 

.  _        5"*' 

■■ 

1 

f 

f 

1                                        1 

JL 

^-n-r-r-T-^ 

rnr—                         1       1   1 

T.lLX.im 

Form  31.    Street  Margin  Ledger 


Q/^AUAjCurvb  iCjiS  ^jMot/i^ 


i^ 


BOUGHT     rCOM 


Date 


'Ml 


Price 


i2 


00 


Remarks 


j(Wi>.tf^^w»^ 


SOLD   TO 


Date 


Tumid 


PVice 


J2 


Remarks 


T^i/VbcJt 


DEBIT 


CREDIT 


2gc 


Form  32.    Street  Ledger — B.  &  Co. 


II 


Ij 


292 


FORMS 


M^.^  OffMn 


New  York. 


y^a^- 


^9L^^lL 


CHA5  fAIRFiELD  &  CO 
927  William  Street 


Form  33.    Customer's  Statement 


VijuAl^LiL^ 


CHAS  PAlRf  lELO  &  CO. 
927  William  Street 


At  the  close  of  business  to-day  we  have  on  our 
books  the  following  OPtN  TRADES  for  your  account. 


LONQ 


Quality 


Commodity 


Mce 


SHORT 


Quantity 


^00 


Commodity 


j^ 


fVice 


1223 


"ElSTOF 


Kindly  notify  us  at  once  of  any  discrepancy 

ChA5  rAIRflElLDficCO 


Form  34.    Statement  of  Open  Trades 


COTTON    BROKERAGE 


293 


Nq.^ 


Account  -  Sales  of 
CHA5.  rAIRflELD  &  CQ 

927  William  Street 

NewYorK 
Statement  of   Soo  Bales  Cotton 


f9^  Delivery 


Bought  and  Sold  by  order  and  for  account  of 


Form  35.    Account  Sales  Statement 


t.H 


^ 


294 


FORMS 


tl 


*i 


=tl 


l> 


COTTON  (mrna  blotter- Bought hr(LL)dl^ Delivery 


BALES 


yg>o 


100 


JfiC 


/<90 


/oo 


FPOM      WHOM 


^^^4Aap£<^^ 


<^fvt^t^/»t.t— """'"tgp 


PCICE 


J2 


QL 


izU> 


iicL 


J2. 


O^ 


Jl 


aJ5T0MEB 


y^QirtH^ 


^  'io  /fu 


AjC 


et 


OIK^^C^ 


O 


O 


Form  36a.    Street  Blotter  (left) 


o 


o 


COrrON  CONTRACT  BL0nEC-5old  fhr  jluU    IQ/^  Delivpry 


BALE5 


fOO 


100 


fO0 


100 


loo 


/oo 


/oo 


lOO 


foo 


100 


TO  WHOM 


^}i-  .^W^g^^cce  %  C 


PCICE 


IL 


^ 


J± 


n 


JL 


P- 


Jl 


Jl 


JX 


Jl 


n 


J2 


/> 


^ 


1^ 


If 


a. 


n 


If 


If 


CUSTOMED 


^V./M(M^ 


Form  36b.    Street  Blotter  (right) 


COTTON    BROKERAGE 


29s 


o 
et 

u 

a 
o 
o 


10 

to 


c« 


a 


9 
O 


•S     £ 

o 

..    ►-» 

2S  ^ 

N  (0     |_ 

ei  S  -^ 

£  S  'r 
90   bo 

So  « 
•^      Oh 

^  "-^ 

§0  ^ 
^-§ 

S       < 


> 
o 

-s 

o 

.a 


ft 

a 

a 

9 


O 


CO 


O 
(X4 


296 


FORMS 


COTTON    BROKERAGE 


297 


K, 


I 

W 


o 

u 

< 

bo 

G 


O 
O 

bo 

i-i 


C/3 
CO 

a 

O 


! 


ER 
Price 

y  „ 

si 

roB! 

Bales 

H*                                              AM- 

L^l                                                 At 

51 

&      0, 

y  5                                                                       /[ 

«                                                         / 

r 
1- 

1 

11 

3   !> 

» 

1 

ULY 
Bales 

r 

.J 

1 

11                      }- 

'  i 

.8      ^   .     .     .    . 

al     §  §   8  8  § 

<  (g     -.  ^   ■*                                           — 

i  jB     ^    '    •    '    •                                  JL 

1  -                        jL 



8 

Bales 

^_  — 

^  s^ 

"^  2 

c 

3 
O 
u 
o 

< 


o 

t/2 


•g, 


o 
o 


bo 
i-i 


m 


B 


ii 


DV 


298 


FORMS 


MAI2GIIN    CALL 


Trom 

CHA3t  FAICHELD  &  CO. 
9Z7  William  5treet 


New ^rk  "071:^^25.  sii 
Rease  deposit  in  .^OTripm'.^Uo^  through 

New  York  Cotton  Exchange,  margin  to  egual  market 
price  on  all  open  contracts  with  you.  Of  deposited 
elsewhere,  the  deposit  will  be  at  your  risk) 


\6urs  nespectfuHy 
CHA5.  TAIRFJELD  &  CQ 

Ffer  pro....^^.'&^^^j^c/  _ 


Form  39.    Margin  Call 


We  have  this  day  delivered  to  Superintendent 
of  New  York  Cotton  Exchange,  certified  check  for 

♦2500=  for  deposit  in  "K.  U  X^  3m^.$^_£or 

in  response  to  your  call  for  margin. 


Yours  truly 

3  H.  BELL  &  CO. 

Ffer  pro..(^X9l%<xWy-. 


Form  40,    Margin  Response 


H 


COTTON    BROKERAGE 


L-a 


a   A 

i 


S^  ipx: 

(^  1:^  ^  :ij  _  2*     I 


h^ 


Ci 

o 


UJ 


•d 

5 

I 
o 


o  ?i  I^  O  '^  c^ 


cu 


•a 


«G  CO  C  -  S 


1^ 


i 

« 

c 
cm 


1^1 


«  7=  «^  (0  2 
£    ^    0)    (U    >< 

a>     -^  T-« 
^  ^  13  T3  " 

Q  c  C   r-  +_> 

7  :l^  X3  J5  g 

->   52   CD   rrt    t.   C 
^  j^   --  a»^ 


(oo; 


3 
4-1 

C 


^ 

0 

0 
0 

^ 

•8 

0 

o< 

Oi 

CD 

O 


a 


(0 


ft 


I 


•3 

u 
•»  -^^ 

u 

rt  C 

S"a 


o 

Ma 


I 


300 


FORMS 


COTTON  CONTRAQ  BLOnEFl-Bcxjght  for  0^nkj9/6  Delivery 

DatE  ^jOAxL  18.    iQis 

BALES 

FROM     WHOM 

PRICE 

CUSTOMER 

/ 

)0O 

f:^r^ 

J2^ 

^gr^.'Lfer^f- 

ou} 

100 

11 

Ho 

100 

12 

A/C? 

100 

12- 

Ho 

100 

n 

A/O 

100 

IXH<i 

100 

too 

12^ 

12  Uo 

100 

12140 

1 

100 

1         ~1 

1 ; n 

n 

-J 

' — ' 

U 

- 1 

Form  42a.  Street  Blotter  (left),  showing  Street  let-out  transactions 


COTTON  CONTRACT  BLOTTER -Sold  for  O^i'y     niL  Delivery 

Date  7)UajcL^iI        (CffS 

BALES 

TO  WHOM 

PRICE 

CUSTOMER 

1 

/oo 

^r^ 

n 

4o 

/St^O-'cfc^    ^-OijJ-' 

wo 

^^ 

n 

Uo 

100 

^f^ 

n 

Uo 

100 

-^r^o 

12 

Uc 

100 

* 

,x 

Uc 

100 

« 

n. 

H6 

loo 

4^^^0 

11 

Uo 

loo 

■ 

12 

*k> 

<               1-1 

100 

4 

0 

ifo 

: 

100 

_    ■■ 

• 

17 

Ho 

1 

n ■-.     ^           •: 

Form  42b.  Street  Blotter  (right),  showing  Street  let-out  transactions 


COTTON    BROKERAGE 


301 


CLEARING  HOUSE- NEW  YORK  COTTON  EXCHANGE 

Reporf  cf  M^  JaJniudA.  ^<&.         items  Cleared  Jil_ 
VenXo^Aoc^.n^Mh..  Balance Owedf ;?/^a.Balanoe Oaimed. — 


WE 

CWCTO 


vk. 


AusHn&Rand 


Backe&CQj.5 


Baily&Gild 


Barren  &  Co. 


WE  CLAIM 


Bell&Co,5H. 


Carpenter  &  Co. 


Chaplin  &C0.5B      Y'' 

r\ , »  r^ 


ClemnDons  &  Co 


2£ 


I 


P 


QC 


23 


m 


Dickey  Bnas  &  Ca 


rairfield&Cp^Chas 


Gibert  &,  Co 


(jwynne&Co 


Hall&5Hle5 


hamlin  &  (jo. 


Havden.  Stokes  &(g 


Norton  &Co..EE 


HubbertBras, 


Josephs  &.Lewi5 


Kendal  &  Whitman 


Ledman  Bros 


WE 
OVCTD 


tvE  CLAIM 

rcoM 


Logan  &Brvce 


Mg^farland  &  Co 


Muller  &  Cq 


Newburq  &  Co. 


O'Donnell  &  Co 


Randolf.  EC 


/3/: 


Thoma^tTowne  &  Co 


30 


Wandell&Adamson 


V\fell5&Co,TM. 


Ill 


m: 


RECAPITULATION 


OHZD 


I 


Column  1 


Balance 


aAlMED 


im 


l^i 


■in: 


Form  43.    Clearing  House  Sheet  used  in  Settling  Transactions 


%  0 


302 


FORMS 


Cleanng  Comparison  5lip  from  CHA5.  FAICflELD  &  CO 

3.%.^lM  rC  New  York.    0^?!^A__i9z^ 

Wfe  claim  fnom^  on  the  following  contracts 
for  the  future  delivery  of  cotton  to  be  adjusted  thnaugh 
the  Qeanng  house 


Form  44.    Bill  used  in  Settling  Transactions  in  Qearing  House 


COTTON    BROKERAGE 


303 


o 


J3 


bo 

'-3 
c 
o 
o* 

V) 

4)  /"^ 

«  o 
V  o 


bO 


o 
£  o 

G 

E 

t/3 


(A 

I 

Wi 


E 

u 


304 


FORMS 


COTTON  BROKERAGE 


305 


S 

U 


bo 

s 

C 


V 


<u 


boc 

u  u 

a; 


-SI 

o 
u 


u 

o 

■«-» 

c 
a; 

a 

V 
■*-• 

a 

■*-» 

C/5 

en 

u 

O 
u 

PQ 


o 


B 
o 

u 


LONG 


poiNrrs 


6375- 

iBoc 


5 


5gc 


5H0RT 


POINTS 


^IclniSt>r 


il 


151' 

00 


/nS3- 


Form  46.    Customers*  Open  Trades 


5H0RT 


700  OnoAdL 
3oo         ' 

3oo    ^cXUi/r 


Soo 

sfOO 


^^^^m.Hr 


POINTS 


fiiSi 


Form  47.    Street  Open  Trades 


CONTRACT  DirrERENCK 


DR. 


5^22 


3«r- 


/fS: 


CR. 


j/Wtfi^t^iUi^Crvvi/io    1^ 


nil"    M 


/5Sc 


/5J3 


Form  48.    Contract  Differences  "Dummy" 


3o6 


FORMS 


COTTON  BROKERAGE 


I 


J 


I 


II 


( 9.59  OclocK), 


'  Take  notice  that  on  March  31. 1916.  we 
shall  deliver  to  you  50.000  pounds  of  cotton  in  a- 
bout  100  square  bales  m  accordance  with  the 
tenns  of  our  contract  of  sale  to  you.    We  pledge 
ourselves  to  deliver  before  2  PM  on  the  day  spec- 
ified for  delivery,  to  the  last  holder  hereof  a 
Warehouse  receipt  or  receipts,  or  a  Pro  Forma  bill 
as  provided  m  5ec  57  of  the  By-laws,  and  either 
vn  the  same  time,  or  as  soon  thereafter  as  prac- 
ticable, an  Inspector's  certificate  or  certificates 
of  grade,  upon  written  notice  of  the  last  holder 
hereof,  cf  the  holding  of  the  same  to  us.  not 
later  than  4  PM  on  the  day  previous  to  the  one 
herein  specified  for  delivery  of  the  cotton.  This 
notice  to  be  delivered  to  us  simultaneously  with 
our  delivery  of  the  Warehouse  receipt  or  re- 
ceipts to  the  holder  thereof 

(Signed)   CHAS.  FAIRfJElLD  &  CO.. 
per  pro  "^^  "GjmJUlsy,/^ 


Conditions 
(Conditions  of  sale  printed  here  on  original  form) 


rORM  OF  TRANSFER. 

New  York  &KaA.cl2a  M 


TIME 
RECD 


ACCEPTED  BY 


^pi/T  f^o 


TRANSFERRED    TO 


J.  ^  ypeppe/r  tjoo 


Form  49.    Notice  of  Delivery  and  Form  of  Transfer 


307 


a 
o 

■*-» 

o 
U 


> 

Q 

bo 
c 

u 


m 
a 

u 
u 

C 

a 
E 

Q 


o 
10 


& 


%!} 


iiti  I 


I 


#!■  I 


i  i 


m 


f 


308 


FORMS 


SOLICITORS  PRODUCTION 
Month  flf    ^loA^^ly    iQ/^ 

SOLICITORS 

>  EXPEN5E 

^Wl 

te« 

C4 

a 

m 

ll 

JJi. 

r 

fjC^ 

m 

.M 

^r 

5JJ 

f 

/  2a^ 

1/ 

/3oo 

^ 

fc/ — 

%  3ik)o 

70c 

/2(?o 

l$oo 

3*    joo 

2oo 

3oo 

100 

Joo 

3   ^feoo 

700 

Ooc 

;?oc 

HiXK) 

3Sco 

^  Vpc 

•]Do 

aoo 

too 

Tjoo 

S    u 

/OO 

5oo 

Q  iqoo 

U 

ttoo 

1700 

lo   ^ 

4^x> 

200 

II  fSoo 

2oo 

Uoo 

900 

/3  ;3oo 

/^oo 

2oo 

ceo 

/S  S-xoo 

;ooo 

100 

'^100 

i  \iioo 

200 

1200 

n  woo 

:?oo 

poo 

boc 

iS    2oc 

200 

iq  (>oc 

()eo 

50  /ooo 

Boo 

^0 

200 

71 

Hi   HOC 

loo 

;<XW3 

37  5K00 

2oo 

2200 

2i    3oo 

too 

aoe 

S*    *^ 

,. 

^0 

rj^ 

SBlary 

'?5o 

ISq 

37^ 

L, 

Expense 

1^ 

/a54 

Ibbi 

TJoo 

ice 

^ 

lioo 

53/00 

/ooo 

ComrrKh. 

V- 

'(. 

% 

V 

53(0 

'ioc 

Expense 

50C 

1^ 

f5i. 

m^  % 

4co 

i» 

ftsfS-" 

^ 

:to 

l(>Sf4 

r" 

-(00 

- 

1 

Form  51.    Solicitors'  Production  Record 


COTTON    BROKERAGE 


309 


t/boi/^^w  t<fi3  2uf^^ Or^-^c 


BOUGHT     fTtOYA 


m 


TsMtL 


FVicfe 


Jl 


10 


Remarks 


-^yCtox  kj-c'd. 


SOLD  TO 


m 


&£.dL 


Price 


/2</o 


Remarks 


JAa%</>fu->totlce. 


DEBIT 


CREDIT 


^^2 


Form  52.  White  &  Co.'s  Account  in  Fairfield  &  Co.'s  Street  Ledger 


2jtC^P*l£u-  l^fS  ^Dl£4MVUl 


7k^9£xaJU^^^^o 


BOUGHT     FROM 


Date 


0^ 


Al 


Price 


/2 


10 


Remarks 


50LD   TO 


htj. 


3t 


fVice 


/2 


"Aj 


Remarks 


^LOiia^yio^^ 


T-  I     I 


DEBIT 


TrrTTllI    iiiurm 


CREDIT 


/Jo 


Form  53.  McFarland  &  Co.'s  Account  in  White  &  Co.'s  Street  Ledger 


%.C£/^uJ^  /^iS  SbdwtA^f 


Ofn/C^  *Wo 


BOUGHT      FROM 


Date 


dSti 


h 


JU- 


3/ 


FVice 


n^-o 


Remarks 


JJa*^ 


yietucs. 


SOLD   TO 


Date 


(2^ 


IS 


Phce 


J2I0 


Remarks 


DEBIT 


^ 


LI2 


I    I  I 


CREDIT 


-rrrrmrmTrr-i 


Form  54.  White  &  Co.'s  Account  in  McFarland  &  Co.'s  Street  Ledger 


I 


>  a 


310 


FORMS 


Nan  38 


New  York.    ^i^c^^^^A^  3i     iq/.^ 


TO  M5FARLAND  &  CO  dr. 


TERMS  CASH 
W''y'»8«-E  BY  CCRTlFieO  CHECK 


MARKS 


STORES 


jL^tWElGHING        MqS3S  LBS 


"^IstycK'fS      1(0  6aA« 


^L£SS  ALLOWANCE  3U    LP5     tlqUlO    ^^7  U-Q 


h  COST  INSPEaiQH.  CLASSIFICATION  *(IRTIFtCATrS.»l2&«v^ 
PREMIUM  rOR  STAPLE         X 


■^}  MID0LIN6 


OR- 


TCP  GRADE     11x70 


ALLOWANCE  TOR  UNCOMPRtSSCD  COTTON  \ 


^  ^3a 


II  ^o 


it>5(] 


J2>S 


2? 


IS 


00 


'i^us- 


BALANCE  DUE  (^ 


:*©tr 


Bales      ABOVE  MIDDLING 


CLASSIFICATION 


7^7 


7 


^3Mg 


:2: 


I£ 


1^ 


FAIR 


e     I  75 


WOtia 


STRig  MIDDUNG  FAIR      1.50 


MIDDLING  FAIR 


9     130 


STRin  GOOD  MIDDLING  ©       90 


FULLV  GOOD  MIDDLING  9       78 


GOOD  MIDDLING  ©       15 


BARf  LV  GOOD  MIDDLING  f       48 


Bales    BELOW  MIDDLING 


/    MIDDUNG 


<P  BAS'S 


looths 


GOOD  MIDDUNG  TINGED    VmotMop 


BARELY  MIDDLING 


@ 


.25 


STRirt  MIDDLING 


32 


FUUV  MIDDLING 


16 


STRIG  GOOD  MI0OL16  TlN5fD(?      45 


MIDDLING 


^  BASIS 


GOOD  MIDDLING  UNGfD  ValcfMoc 


7  STRig  LOW  MIDDLING  @     50 


l>  FULLY  LOW  MIDDLING         (?     85 


US  LOW  MIDDLING 


@  1.25 


^50 


10  20 


23  STRiq  GOOD  ORDINARY        @  2X» 


/   GOOD  ORDINARY 


@  iOO 


TOTAL  ABOVf  MIDDLING 


STRICT  MIDDLING  TINGED    ®     20 


MIDDLING  T1NGCD 


%  m 


^o-oo 


4L 


00 


3  00 


STRICT  LOW  MIDOUNGTWGCD   ®  1.25 


LOW  MIDDLING  TINGED      9  3X)0 


MIDPLING  STAINED 


€>  I2S 


•  Cents  and  hundredrha  of  cents  per  pound 


^1    TOTAL  BELOW  MIDDLINQ" 


/1270 


Form  55.    Spot  Bill 


COTTON    BROKERAGE 


3" 


Date 

Contract  Nunr^ber 

Stores 

Classification  Na 

Marks 

Bales 

Weiaht 

Stored 

Charges  paid  1d 

Certificates  expire 

Premium 

.Discount 

Notice -price 

Date  when 
samples  recaved 

Account 

Fronn  whom 
received 

Contract 
purchase  price 

• 

Date  of'  actual 
purchase 

Remarks  : 

Date  delivered 

lb  whom  delivered 

Samples  delivered 

Price 

Storage  and  labor 
allowed  or  paid 

Date  of  sale 

\\ 

Actual  sales-price 

Account 

Remarks 

Form  56.    Spot  Register 


^ 


II 

11 


I 


I* 


CHAPTER  XXXVII 


PRODUCE  BROKERAGE  FORMS 


fii't 


314 


FORMS 


^ 


BOUGHT 
Com 


CHA5.  TAIRriELD  &  CQ 

New  York. (Laaj.^  \qj£_ 


II 


Form  57.    "Bought"  Slip 


SOLD 


"Wheat 


CHA5  rAlRPIELD  &  CQ 


Form  58.    "Sold"  Slip 


PRODUCE    BROKERAGE 


315 


ir> 


3 

C 


V 
III 

V 
in 

S 

o 

u 

G 


o 


I 


3i6 


FORMS 


i  ■m 


ii 


II 


INDEX 


Abbreviations,  purchases  and  sales  book,  31 
Account, 

books  of  (see  below) 
cotton  brokerage, 

contract  differences,  141,  169,  173 

form,  305 
customers*  open  trades,  173 

form,  305 
Street  ledger,  149,  198,  206 

forms,  309 
Street  open  trades,  174 
form,  305 
stock  brokerage, 

customers'  ledger,  27,  40 
forms,  280 
Account,  books  of,  25  (See  also  individual  book  titles  throughout 
the  index;  for  list  of  books,  see  table  of  contents) 
closing,  114,  189,  208 

expenses  omitted,  115 
cotton  brokerage,  132 
adjusting  entries,  189 
customers'  records,  132 
"Street"  records,  133 
Exchange  rules  affect,  25 
final  entries,  91,  97,  98 
list  of  books  required,  27 
produce  brokerage,  205 
accounting  for  Chicago  trades,  223 
closing,  208 

customers'  records,  206  (See  also  "Cotton  Brokerage"  above) 
sequence  of  recording  transactions,  64 
state  laws  affect,  25 
stock  brokerage,  25 
uniformity  of  method,  26 

317 


3i8 


INDEX 


•it 


li! 


Account  sales  register,  cotton  brokerage,  133,  141.  143  145 
form,  295  ' 

Account  sales  statement,  cotton  brokerage.  147 

form,  293 
Accounts  payable,  customers', 

cotton  brokerage,  146 
Accounts,  stock  brokerage, 

borrowing  stocks  against  short  sales,  87 
customers'  purchases  and  sales,  85 
financing  the  transactions,  86 
odd  lot  transactions,  88 
opening  entries,  84 
Accruals,  treatment  on  books,  116 
Adjustment  entries,  method  of  handling,  37 
Agency, 

duration  of,  22 
law  of, 
brokerage  governed  by,  19 
New  York  State,  20 
Allowance,  cotton  shrinkage. 

New  York  Cotton  Exchange  rule,  199,  200 
Analysis  journal,  cotton  brokerage, 

form,  295 
Assets, 

cotton  brokerage,  193 
stock  brokerage,  120 

^"^^dltif ")   '^''''^    Brokerage   Auditing,"   "Cotton   Brokerage 

B 

Balance  sheet, 

cotton  brokerage,  193 

stock  brokerage,  119 
Bank  loans,  collateral,  101 
Bankrupt,  release  of  securities  held  by,  124 
Bankruptcy,  court  decisions  re  customer's  equity,  124,  125,  126 
Barley,  Chicago  Board  of  Trade,  221 
Bids  and  offers, 

"at  three  days,"  30 

"buyers'  or  sellers'  options,"  31 

"cash"  method,  30 

"regular  way,"  30 
Bids,  "10:30  A.  M.,"  cotton  brokerage,  160 


INDEX 

Bill,  cotton  brokerage, 

settlement,  164 
spot,  197 

form,  310 
used  in  settling  transactions  in  Clearing  House,  164 
form,  302 
Blotter  (See  also  "Blotters"  below), 
forms,  258,  259,  271-276 
barometer  of  financial  conditions,  36 
basic  financial  record,  33 
cash  entries,  34 
clearing  house,  33,  37 
combined  journal  and  cash  book,  34 
cotton  brokerage. 
Street,  133,   148 
forms,  294,  300 
ex-clearing  house,  33,  37 

uses  of,  81 
form  of,  37 
principle   of,   33 
produce  brokerage,  206 
stock  brokerage,  27 
clearing  house,  33,  37 

forms,  258,  259,  271,  272 
ex-clearing  house,  33,  37,  81 
forms,  273-276 
Blotters,  36 

alternating,  method  of,  37 
balancing  of,  77 
clearing  house,  77 
ex-clearing  house,  80,  81 
Bonds, 

coupons  on  bonds  out  as  collateral,  102 
interest  on,  105 
Books  of  account  (see  "Accounts") 
"Borrow  a  place,**  cotton  brokerage,  182 
"Borrowed  and  loaned**  books, 
money,  27,  55 

forms,  263,  264 
stock,  27,  54 
forms,  261,  262 
Borrowed  stock  (See  "Stock,  borrowed") 
"Bought"  slip,  produce  brokerage,  210 
form,  313 


319 


m 


kt 


k\ 


320 


INDEX 


Branch  offices, 

cotton  brokerage,  184 
expenses,  118 

Broker  (See  also  "Brokerage,"  "Brokers,"  "Customers") 

clearing  house  balance,  75 

cotton  brokerage, 
"net  interest,"  182 

customer  and,  legal  relation,  19,  20 

duties  of,  20 

liability  in  New  York  State,  20 

pledging  of  customer's  securities,  21 

Stock  Exchange  membership,  24 

Stock  Exchange  seat,  disposal  of  bankrupt's  membership,  127 
Brokerage  (see  "Cotton,"  "Produce,"  "Stock  Brokerage")     . 
Brokers  (see  also  "Broker"  above) 

cotton, 

settlement  between,  methods  of,  157,  158 
statement,  133,  165 
forms,  303,  304 
Produce  Exchange,  classification,  206 
Buyers*  or  sellers*  options*  31 
interest,   31 


Call  loans  (see  "Loans**) 
Call,  margin, 

cotton  brokerage,  153 

form,  298 
produce  brokerage,  219 
"Called**  stocks,  39.  51 

Carrying  transactions,  cotton  brokerage,  185 
Cash 

entries  on  blotter,  34 
Cash  book, 

cotton  brokerage,  133,  138 
forms,  289,  290 
balancing  of,  139 

"Cash**  method,  bids  and  ofTer,  30 

Certificate,  margin,  cotton  brokerage, 
forms,  299 

Chicago  Board  of  Trade,  204,  221 


INDEX 

Clearance  loans  (See  "Loans") 
'^^learances,  cotton  brokerage,  185 

Clearing  House, 
Cotton,  161 
payments  on  settlements,  164 
ring  clerks,  161 
sheet, 
form,   301 
Produce,  209 
adjustments,  212 
customers'  settlements,  212 
ledger,  207 

operation  of  system,  210 
sheet,   210 
forms,  314,  315 
Stock, 
blotter, 

forms,  271,  272 
broker's  balance,  75 
deliveries,  72 
delivery  prices,  72 
function,  67 
listings,  68 
methods,  69 
sheets,  70 
form,  270 
balancing  of,  71 
tickets,  69 

"Close-out,"  defined,  22 

Closing  books, 

produce  brokerage,  208 
cotton  brokerage,  189 
stock  brokerage,  114 

Co£Fee  brokerage,  226 

Collateral, 

record  of,  money  borrowed  and  loaned  book,  55 

release  by  payment  of  loan,  56 

substitutions,  55 
Commission, 

coffee  brokerage  (defined),  226 

cotton   brokerage,   half   commission  brokerage,   187 

cottonseed-oil  brokerage   (defined),  225 

grain,  N.  Y.  Produce  Exchange  rate,  205 


321 


322 


INDEX 


INDEX 


323 


■1 


II 


\l 


Commission — (Continued) 
stock  brokerage, 
floor  brokerage,  117 
rate  in  marginal  operations,  61 
stock  and  bond  sales  or  purchases,  24 
Confirmation  slips,  cotton  brokerage, 

point  balance,  175 
Contract, 

coffee  brokerage  (defined),  226 
corn  or  wheat  (defined),  205 
cotton,  limits  of,  199 
cottonseed-oil   brokerage    (defined),  225 
Contract   analysis   journal, 

cotton  brokerage,  133,  141,  143,  145 
form,  295 
Contract  book,  customers,  cotton  brokerage, 

form,  286 
Contract  differences  account,  cotton  brokerage, 
defined  and  analyzed,  141,  169 
"dummy"   account,   173 

form,  305 
factors  entering  into,  142 
"point  balance"  and,  167 
proof  of,  173 
Contract  differences — grain  account, 

proof  of,  214 
Contract  di£Ferences^-oil  account, 

customers*  gains  or  losses,  225 
Com, 

Chicago  Board  of  Trade,  221 
"contract"  defined,  205 
price,  basis  of  quotations,  205 
Cotton  (see  also  headings  below), 
classification  of,  201 

grade  premium  and  discount,  201 
contract  blotter  (See  "Street  Blotter") 
contract,  limits  of,  199 
cost, 
inspection,  classification  and  grading  certificates,  200 
insurance  and  interest,  203 
purchase  price,  200 
storage  and  labor,  202 
deliveries,  actual,  196 
grades  of,  N.  Y.  Cotton  Exchange  rules,  180,  200,  201 


Cotton — (Continued) 

"one  contract"  defined,  131 

"point"  defined,  132 

prices  quoted  in  cents  and  hundredths  per  pound,  131 

shrinkage  allowance,  199,  200 

spot, 

cash  transaction,  132 

technicalities  of,  196 
weight  per  bale  prescribed,  131 
Cotton  brokerage,  129  (for  references  to  books  and  records,  see 
individual  titles  throughout  index) 

forms,  284-311 
auditing, 

accounts  payable,  253 

commissions,  253 

interest  on  margins,  254 

open  trades  of  customers,  252 

same  procedure  for  produce  brokerage,  254 

scope  of  audit,  249 

Street  margins,  251 

verification  of  contract  differences,  252 
books  of  account,  closing,  189 
branch  offices,  184 
carrying  transactions,  185 
clearances,  185 
dissolution  of  business,  195 
floor  brokerage  business,  185 
half  commission  brokerage,  187 
name  or  price  change,  186 
purchases,  direct,  176 
sales,  direct,  176 
solicitors,  184 
speculation,  176,  177 

terminology, 
borrow  a  place,  182 
close  out,  168 
difference  method,  132,  136 
"flat"  rate,  201 
hedging,  176,  177 
margin  certificate,  154 
market  margin  call,  153 
net  interest,  182 
one  contract,  131 
original  margin,  155 


lij 


m 


324 


INDEX 


Cotton  hrokersigt— (Continued) 
terminology — (continued) 

point,  132 

point  balance,  147,  170 

"ringing."  158 

short  notice,  181 

sign-up   slips,  148 

stop,   135 

straddles,  178 

Street  let-out,  161 

taking-up,  196 

tender  day,  129 
Cotton  Exchange, 

New  York  Cotton  Exchange  rules,  131,  180,  200,  201 
Cotton  futures, 

market,  129 
customs  of,  131 
defined,  129 

trading  is  speculative,  130 
Cottonsecd-oU  brokerage,  225 

"contract"  defined,  225 
Coupons  (See  "Bonds") 
Court  decisions. 

Federal  Court, 

release  of  securities  held  by  bankrupt,  124 
New  York  court, 

customer's  equity  in  deposited  securities,  126 

Markham  v.  Jaudon,  19 
North  Carolina  re  bankrupt  broker,  125 
United  States  Supreme  Court, 

broker  an  agent,  19 

equity  in  clearance  loans,  126 
"Cover,"   defined,  41 

Credit  extension,  customer's  operation  upon,  60 
Customers, 

accounts,  110 

accounts  and  statement,  relation  between,  113 

accounts  payable,  cotton  brokerage,  146 

cash  margin  operation,  60 

contract  book,  cotton  brokerage,  132,  135 
form,  286 

contract  difference  credit,  203 

credit  extension  used  by,  60 

defined,   44 


INDEX 


325 


Customers — (Continued) 
duties  of,  21 

equity  in  deposited  securities,  126 
interest   charges,   110 
ledger  accounts,  stock  brokerage,  27,  40 

forms,  280 
ledger,  cotton  brokerage,  132,  138 

form,  287 
margin  book,  cotton  brokerage,  132,  134 

form,  285 
marginal   requirements,   59 
open  trades,  cotton  brokerage,  173 

forms,  305 
purchases  and  sales  book,  cotton  brokerage,  134 

forms,  284 
records,    cotton    brokerage,    134    (See    also    individual    titles 

throughout  index) 
"short  accounts"  do  not  draw  interest,  112 
statements,  110 

cotton  brokerage,  146 
form,   292 

stock  brokerage,  110 
forms,  277-279 
stock  margin  record,  58,  89 

forms,  265,  266 


Day  (U.  S.  Supreme  Court  Justice),  decision  by,  19 
Delivery, 

actual,  cotton  brokerage,  196 
accounting  entries,   198 
sales  for,  180 
demand  by  purchaser  preceding,  cotton  brokerage,  179 

form,  306 
notice  of,  cotton  brokerage,  178 

form,  306 
Saturday  not  a  day  of,  30 
Demand  by  purchaser  preceding  delivery  of  cotton,  179 

form,  307 
Depreciation,  reserve  for,  116  (See  also  ''Reserve  Accounts,  Cotton 

Brokerage,"   194) 
"Difference*'  method,  cotton  brokerage,  132,  136,  137,  141 
Direct  settlement  method,  cotton  brokerage,  158 


326 


INDEX 


INDEX 


327 


I 


i' 


V ' 


Mil 


;f 


I 


i 


Dissolution, 

cotton  brokerage  business,  195 
stock  brokerage  business,  123 

Dividends   (See  "Stock") 

Due  bill,  defined,  108 


Equity  (See  also  "Equities"  below) 
collateral  loans,  103 
customers, 

bankrupt  broker's  Exchange  membership,  127 
clearance  loans,   126 

protection  of,  in  bankruptcy  of  broker,  124 
securities  deposited,  126 
Equities, 

balance  sheet  and  equity  statement  combined,  122 
table  of,  cotton  brokerage,  194 
table  of,  stock  brokerage,  121 
form,  282 
compilation  of,  41 
Exchange  (See  "Cotton,"  "Stock  Exchange") 
Ex-clearing  house  blotter,  stock  brokerage,  33,  37,  81 

forms,  273-276 
Ex-dividend,  106 
Expenses, 

cotton  brokerage, 

factors  in  closing  books,  190,  191 
stock   brokerage, 
classification,  114 
general  and  administrative,  117 
omitted  in  closing  books,  115 
solicitors'  and  branch  office,  118 

F 

Failure  and  dissolution, 

cotton  brokerage  business,  195 

stock  brokerage  business,  123 
Financial  conditions,  blotter  indicates,  36 
Financial  statement,  cotton  brokerage,  190 
Floor  brokerage  business, 

cotton  brokerage,  185 

stock  brokerage,  commission,  117 
Futures,  cotton  (See  "Cotton  Futures") 


General  journal,  cotton  brokerage,  133,  138 

form,  288 
Grading  rules. 

Cotton  Exchange,  180 

U.  S.  Dept.  of  Agriculture,  180 
Grain, 

Chicago  Board  of  Trade,  221 

commission  regulated,  205 

H 

Half  commission  brokerage,  cotton,  187 
"Half-stock,"  defined,  90 
"Hedged,"  defined,  41 
"Hedged"  accounts, 

objections  to,  43 

"short"  accounts,  method  of  handling,  42 
Hedging, 

cotton  brokerage,  176,  177 

cotton  futures  as  a  means  of,  130 


Income, 

cotton  brokerage, 

factors  in  closing  books,  190,  191 
stock  brokerage, 

classification,  114 

net,  119 

secondary,    117 

sources  of,  117 

statement,  117 
Indorsement,  Stock  Exchange,  106 
Insurance  and  Interest,  spot  cotton  shipments,  203 
Interest, 

bond,  105 

buyers'  or  sellers'  option  contracts,  31 

cotton  brokerage,  154 

rate  allowed  on  margins,  155 
source  of, 

clearing  house  items,  38 

ex-clearing  house  items,  39 
stock  borrowed,  97,  99,  100 


328 


INDEX 


INDEX 


329 


/"ill 


ii 


i 


Journal, 

contract  analysis,  cotton  brokerage,  133,  141,  143  145 
form,  295  ' 

general,  cotton  brokerage,  133,  138 
form,  288 


Lard,  Chicago  Board  of  Trade,  221 
Ledger, 

classification  of,  stock  brokerage,  40 
clearing  house,  produce  brokerage,  207 
customers, 

cotton  brokerage,  132,   138 

form,  287 
stock  brokerage,  27,  40 
forms,  280 

general  ledger  does  not  control,  43 
general, 

cotton   brokerage,   133,   138 

stock  brokerage,  27,  48 
margin  (Street),  cotton  brokerage,  139 

form,  291 
posting  from  blotter,  method,  35 
private,  stock  brokerage,  27,  44 
securities,  stock  brokerage,  27,  45 
form,  260 

auditing  of,  47 

form  and  ruling,  46 

method  of  operating,  47 
Street,  cotton  brokerage,  133,  149,  198 

forms,  291,  309 

Street,  produce  brokerage,  206 
Liabilities, 

cotton  brokerage,  194 

stock  brokerage,  20 
Listings,  Stock  Clearing  House,  6S 
Loans, 

call,  55,  91 

clearance,  103 

customer's   equity,  126 

collateral  bank,  101 

collateral,  equity  in,  103 


Loans— (CoM/inu^rf) 

collateral   time,    102 
stock  (See  also  "Stock  Borrowed") 
comparison  with  collateral  loans,  46 
Loss  (See  also  "Profit  and  Loss") 
■  customer  to  indemnify  broker,  21 


M 


Margin, 

coffee  brokerage,  226 
cotton  brokerage, 
book  (Street),  133,  151 

forms,  296,  297 
call,  153 

form,  298 
certificate,   154 

forms,  299 
interest,  154 
ledger  (Street),  133,  151 

forms,  296,  297 
market,  time  of  deposit,  156 
original  margin,  155 
record,  132,  134 

form,  285 
response,  153,  155 

form,  298 
same  as  stock  brokerage,  134 
cottonseed-oil  brokerage, 

original  margin  required,  225 
produce  brokerage,  217 
calls,  219 
market,  218 
original,  217 
release  of,  219 
stock  brokerage, 
call  for,  by  broker,  23 
cash,  60 

commission  charged,  61 
customer  must  provide,  21 
defined,  58 
equities,  table  of,  121 

forms,  282 
interest  on  deposit  allowed,  111 


I 

I 


330 


INDEX 


Margin— (Co«/i«M^flf) 

stock  brokerage— (Con^mw^rf) 
record,  58,  89 

forms,  265,  266 
statement,  121 

form,  282 
trading  on,  20,  58 
"Mark-down," 
defined,  53 
issuance  of,  104 
"Mark-up," 
defined,  53 
issuance  of,  104 
Market, 

Chicago  Board  of  Trade, 
barley,  204,  221 
oats,  204,  221 
provisions,  221 
rye,  204,  221 

New   York    Produce    Exchange, 
corn,  204 
wheat,  204 
"Market  down"    (See  "Mark-down") 
Market  margin   (See  "Margin") 

Money  borrowed  and  loaned  book,  stock  brokerage   27    55 
forms,   263,   264  *  ,       , 

relation  to  other  books,  56 

N 

Name,  change  of.  cotton  brokerage.  186 
National  Bankruptcy  Act, 

securities  recovered  by  action  based  on,  126 
"Net  interest,"  broker's,  cotton  brokerage,  182 
New  York  Produce  Exchange  Clearing  Association,  206 

rules  of,  209 

New  York  Stock  Exchange  (See  "Stock  Exchange") 
Notice, 

delivery,  cotton  brokerage,  178 

form,  306 
stop,  cotton  brokerage,  179 

form,  307 
tender  of,  cotton  brokerage,   158,  163 
to  customer,  marginal  call,  23 


INDEX 


Oats,  Chicago  Board  of  Trade,  221 
Offers  (See  "Bids  and  Offers") 
"One  contract"  (cotton  brokerage),  defined,  131 
Open  trades,  cotton  brokerage, 
statements  of,  147 

form,  292 
Street,  174 
form,    305 
Options, 

cotton  brokerage, 
expiration,  130,  181 
"tender  day,"  129 
produce  brokerage,  active  months,  205 
Original  margin   (See  "Margin") 
Overdrafts  on  bank,  purchased  securities  paid  for  by,  51 


Partnership, 

cotton  brokerage, 
dissolution,  195 
stock  brokerage, 
dissolution,    123 
formation,  84 
Point, 

cotton  brokerage,  132 
cottonseed-oil  brokerage,  225 
Point  balance, 

cotton   brokerage, 

confirmation  slips,  175 

contract  differences  account  reconciled  by,  170 
cottonseed-oil  brokerage, 

proof  of  contract  difference — oil  account,  225 
Pork, 

Chicago  Board  of  Trade,  221 
contract  defined,  222 
Premiums, 

stock  borrowed,  97,  100 
Price, 

clearing  house  delivery,  72 
cotton  brokerage, 
change  of,  186 

purchase  and  notice  price  differences,  179 
sale  and  purchase  price  differences,  adjustment,  181 


331 


332 


INDEX 


Private  ledger  (See  "Ledger") 
Produce  brokerage. 

Clearing  House  system, 

N^  Y.  Produce  Exchange  Clearing  House  Association,  209 
conditions  and  customs,  204 
double   contract,   222 
markets, 
futures,  204 
spot,  204 
split  price,  205 
Production  record,  solicitors', 
cotton  brokerage,  184 

form,    308 
stock   brokerage,   64 
form,   281 
Profit,  stock  brokerage,  24 
Profit  and  loss, 

cotton  brokerage,  192 
stock   brokerage,   119 
Proprietor's  capital  account,  120 
Provisions,  Chicago  Board  of  Trade,  221,  222 
Purchases, 

direct,  cotton  brokerage,  176 
financing    of,    96 

Purchases  and  sales,  stock  brokerage,  92 
Purchases  and  sales  book, 
abbreviations   used,  31 
cotton  brokerage,  132,  134,  148 

form,  284 
stock  brokerage,  27,  29,  30 
forms,  256,  257 
bound  book  preferred,  29 
clearing  house,  29 

form,  256 
cx-clearing  house,  29 
form,  257 
"Put  through,"  defined,  37 


Receive  and  deUvcr  tickets,  clearing  house  records  74 
Register, 

account  sales,  cotton  brokerage,  133,  141    143   145 
form,  295 


INDEX 

Register — (Continued) 

revenue  tax,  stock  brokerage,  28 
form,  269 
New  York  State,  63 

spot,  cotton  brokerage,  203 
form,  311 

stock  transfer,  28,  62,  88 
form,  267 
Release,  margin,  produce  brokerage,  219 
Reserve  accounts, 

cotton  brokerage,  194 

stock  brokerage,   116 
Response,   margin    (See   "Margin   Response") 
"Returned"  stocks,  39,  51 
Revenue  stamps,  stealing,  check  on,  64 
Revenue  tax  register  (See  "Register") 
Ribs, 

Chicago  Board  of  Trade,  "contract"  defined,  222 
"Ringing," 

cotton  brokerage,  settlement  method,  158 

Produce  Exchange  seldom  uses,  205 
Rye,  Chicago  Board  of  Trade,  221 


S 


Sales  (See  also  "Purchases  and  Sales"), 
bonds  (See  "Bonds") 
direct,  cotton  brokerage,  176 
stock  brokerage, 
cash  items,  95 
short,  52,  95 
Sales  book,  stock  brokerage,  27 
Saturday,  not  day  of  delivery,  30 
Securities, 

deposited,  customer's  equity  in,  126 
ledger,  27 
form,  260 
Sellers'  option  (See  "Bids  and  Offers") 
Settlements  between  brokers,  cotton  brokerage, 
book,  settlement,  133,  165 

form,  303,  304 
clearing  house  bill  used,  164 
form,  302 


333 


^■ii|i 


334 


INDEX 


INDEX 


II 


Settlements  between  brokers,  cotton  hroktragt— (Continued) 
clearing  house  sheet  used,  164 

form,  302 
direct  settlement  method,  158 
ringing  method,  158 
Street  let-out,  158 
tender  of  notice,  158 

Sheet,   clearing   house    (See   "Clearing  House  Sheet") 

"Short."  defined,  41 

Short  accounts,  interest  not  allowed  customers,  112 

"Short  covering,"  defined,  41 

Short  sales,  52,  95 

Shrinkage  allowance,  cotton,  199,  200 

"Sign-up  slips,"  cotton  brokerage,  148 

"Sold"  slip,  produce  brokerage,  210 

form,  33 
Solicitors'  production  record, 
cotton  brokerage,   184 

form,  308 
stock  brokerage,  64 
form,  281 

Speculation,  cotton  brokerage,  176,  177 
"Split"  price,  produce  brokerage,  205 
Spot  bill,  cotton  brokerage,  197 

form,  310 
Spot  cotton,  technicalities  of,  196 
Spot  merchant,  cotton  brokerage,  176 
Spot  register,  cotton  brokerage,  203 

form,  311 
Statement, 

cotton  brokerage, 
account  sales,  147 

form,  293 
brokers',  165 

forms,  303,  304 
customer's,  146 

form,  292 
financial,  190 
open  trades,  147 
form,  292 
stock  brokerage, 
customer's,  110 
forms,  277-279 


335 


Statement —  ( Continued) 

stock  brokerage — (Continued) 
income,  117 
margins,  41,  121 
form,  282 

Stock, 

borrowed,  51,  93 

call  and  return  of,  99 

interest  on,  94 

returns,  94 

"short"  sales,  51 
borrowed  and  loaned  book,  27,  54 

forms,  261,  262 
borrowing  and  lending,  advantages,  52 
Clearing  House,  68 
dividends  on,  106 

due  bill  covering  transfer  of,  108 
"ex-dividend,"  106 
"half-stock,"  90 
ledger,  27 

form,  260 
lending,  49 
margin  record,  customers,  58 

forms,  265,  266 
odd  lots  of  bonds  and,  record,  29 
transfer,  collection  charge,  62 
transfer  register,  28,  62,  88 

form,  267 

Stock  brokerage,  19   (For  references  to  books  and  records,  see 
individual  titles  throughout  index) 

forms,  256-282 
books  of  account  required,  27 
partnership, 

dissolution,  123 

formation,  84 
terminology, 

close-out,  22 

cover,  41 

hedged,  41 

margin,  58 

mark-down,  53 

mark-up,  53 

net  longs,  41 

net  shorts,  41 


li 


ii' 


33^ 


INDEX 


Stock  brokerage— (Con/mu^rf) 
terminology — (Continued) 
on  call,  33 
short,  41 

short  covering,  41 
stop  loss  order,  22 
stop-out,  61 
throwing  back,  48 
transactions,  methods  of  operation,  83 
Stock  brokerage  auditing,  227 
•asset  accounts, 

depreciation  of  securities  owned,  239 
dividends  receivable,  241 
furniture  and  fixtures,  240 
land  and  buildings,  240 
money  loaned,  239 
revenue  stamp  account,  236 
securities  of  customers,  237 
stock  accounts  receivable,  234,  235 
stocks  borrowed,  241 
equities,  table  of,  247 
expense  items,  247 
failures  and  examination  of  books,  229 

Gov    Hughes'    Committee   on   Speculation   in   Securities   and 
Commodities  (1909),  227  ^^urmes   ana 

income  accounts, 
commissions,  245 

interest  charges  and  credits,  customers'  accounts,  246 
mterest  on  stock  loans  and  premiums,  247 
liability  accounts, 
accounts  payable,  243 
bank  loans  and  brokers*  loans,  245 
dividends  payable,  244 
stocks  loaned,  245 
purposes  of  audit,  227,  228 
scope  of  audit,  229 
Stock  Clearing  House,  function  of,  67 
Stock  Exchange, 
broker's  seat,  23 

disposal  of  bankrupt's  membership,  127 
membership,  23 

New  York,  constitution  relating  to  bids  and  offers   30 
representation   on,  23  ' 

rules  cover  broker  and  customer,  22 


INDEX 


337 


"Stop,**  defined  (cotton  brokerage),  135 
"Stop  loss  orders,"  cancellation  of,  23 

issuance  of,  22 
Stop  notice,  cotton  brokerage,  179 

form,  307 
"Stop-out,"  defined  (stock  brokerage),  61 
Storage  and  labor  costs,  cotton,  202 
Straddles,  cotton  brokerage,  176,   178 
Street  ledger,  produce  brokerage,  206 

"Street  let-out"  method  pf  settlement,  cotton  brokerage,  158,  161 
Street  records,  cotton  brokerage,  133,  148 
blotter,  133,  148 

forms,  294,  300 
ledger,  133,  149,  198 

forms,  291,  309 
margin  ledger,  133,  151 

forms,  291,  296,  297 
open  trades,  174 

form,  305 
settlement  book,  133,  165 
forms,  303,  304 


Table  of  equities,  stock  brokerage,  41,  121 

form,  282 
"Taking  up,"  cotton  brokerage,  196 
Tax  register,  revenue,  stock  brokerage,  28,  63 

form,  269 
Tender  day, 

coffee  brokerage, 

contracts  carried  until,  226 
cotton   brokerage, 

defined,   129 
"Tender  of  notice"  settlement,  cotton  brokerage,  158,  163 
Terminology   (See   "Cotton,"  "Produce,"  "Stock  Brokerage") 
"Throwing  back,"  defined,  48 
Transfer,  form  of,  cotton  brokerage, 

form,  306 
Transfer  register,  stock, 

form,  267 

U 

United  States,  Department  of  Agriculture,  grading  rules,  180 


33^ 


INDEX 


Vault  Kst,  stock  brokerage,  27,  63,  89 
form,  268 


w 


Warehouse  certificates,  cotton  brokerage, 

issuance  of,  197 
Wheat, 

Chicago  Board  of  Trade,  221 

"contract"  defined,  205 

price,  basis  of  quotations,  205 


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